The Financial Markets Authority (FMA) has put NZ derivative issuers on notices following a regulatory crackdown on the sector across the Tasman.
In its latest monthly update, the FMA says a spate of “recent class actions filed in Australia alleging misleading and deceptive conduct in the supply of derivatives” highlights similar issues facing providers of the risky financial instruments in NZ.
Early in August, the Australian Securities and Investments Commission (ASIC) took online platform, eToro, to court over breaches of design and distribution rules in offers of ‘contract for difference’ (CFD) products.
ASIC alleges the eToro “CFD product was far too broad for such a high-risk and volatile trading product where most clients lose money, and that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market”, according to a release.
“ASIC considers that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation and needs, resulting in a significant risk of consumer harm.”
The eToro case follows stop orders invoked against Saxo Capital Markets and Mitrade Global in May and June, respectively, over similar derivatives design and distribution concerns.
In April this year ASIC also cancelled the derivatives licence of Binance Australia, after the regulator found the local arm of the global cryptocurrency trading platform had misclassified hundreds of retail investors as wholesale clients.
“The FMA considers that derivatives are not suitable for most consumers,” the August update says, recommending “all licensed derivative issuers review their practices, policies and procedures” under product suitability rules captured by Standard Condition 12.
Earlier monitoring exercises by the regulator had revealed “poor understanding of Standard Condition 12 across most licensed derivative issuers”.
“We expect suitability assessments to go beyond a ‘tick box’ exercise, to provide a robust and effective gateway that ensures investors understand the products and the risks associated with the investment,” the update says.
“The FMA views any non-compliance with Standard Condition 12 as serious.”
Currently, the NZ regulator has issued 21 derivatives licences, although three – Direct FX, BL Global Markets and EncoreFX – are suspended.