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Financial System Inquiry – Product Intervention Power

Posted on November 26th, 2015 by Sophie Gerber in AFSL Compliance

close-1013750_1280At present, financial products which have higher levels of risk for investors, including margin loans and contracts for difference, are subject to reasonably strict disclosure and marketing requirements. The Financial System Inquiry (FSI) recommendation 22 provides ASIC with far reaching powers to impose additional conditions on risky products.

Whilst ASIC maintains the banning of a product would be rare and occur in very extreme circumstances, there is the opportunity for ASIC to restrict certain products from retail investors. ASIC’s powers could range from imposing additional requirements on the marketing of these products to a complete product ban.

Implications on the Financial Services Industry

The implications for the forex industry are significant, particularly for brokers who predominately provide services to retail clients – the bulk of the market. The Government’s response to the FSI states that implementation of this recommendation will be subject to detailed consultation with stakeholders to ensure any action does not stifle industry innovation, however given the requirements for forex brokers are reasonably onerous already, it appears further intervention by ASIC would likely lead to a stifling of the industry at large.

Any changes to the regulation of derivative and FX products, no matter how slight, will impact industry participants. The impact will be felt by sales teams, compliance staff and may require expensive legal advice to ensure compliance. In addition, any restriction on the ability to issue and sell these products will impact the profitability. For instance, removing derivative products from the retail space would be a cause of great concern for most brokers operating in Australia today.

It remains to be seen how ASIC will utilise their new powers and the extent to which they will intervene in the industry, but it is yet another example of the Government’s crackdown on the FX industry as a whole.

Background to the Financial Systems Inquiry

The Australian Government’s acceptance of all but one of the 44 recommendations of the FSI heralds a new era of government intervention. Recommendation 22 introduces a new product intervention power which enhances the Government’s ability to modify or ban financial products where there is a risk of significant consumer detriment.

Alicia Pevely

Alicia works with Sophie Grace Pty Ltd with a particular focus on compliance and legal services. She assists clients with AFSL and ACL applications, variations and also assists in the implementation of compliance reviews. She provides ongoing compliance support as well as assisting in the preparation of legal advice, commercial agreements and disclosure documents.