Online share-trading platforms across the Tasman have been put on notice to hose-down low-fee claims, tighten custody arrangements and turn down gamification features following a regulatory review of the sector.
In a report published last week, the Australian Securities and Investments Commission (ASIC) noted several areas of concern in the burgeoning direct-to-consumer trading platform market such as spruiking high-risk products, poor governance and misleading statements around fees and ‘safety’.
As well as several high-profile legal actions over risky product promotions, the regulator has pushed some platforms behind the scenes to dial-down claims of zero or low fees and beef up oversight from licensees responsible for online trading operations.
And ASIC also found many providers “designed their platforms to incorporate behavioural levers and choice architecture that can unfairly influence consumer decision making and lead to trading that may result in losses or consumer harm”.
Practices including ‘gamification’ and online influencer-peddling “have the potential to create a complex and potentially harmful ecosystem of stimulant experiences for investors”, the ASIC review says.
“This ecosystem may obscure the true cost to trade, or encourage excessive trading or trading products which are inappropriate for retail investors where the risks may not be understood and result in investor loss.”
Furthermore, ASIC red-flagged some common platform money-holding and custodial techniques such as the use of a single holder identification number (HIN) to pool client assets.
The regulator found in several cases providers had co-mingled client assets with external money or failed to hold customer money in separate trust accounts as required by law.
Simone Constant, ASIC commissioner, said in a statement: “Licensed online trading providers are required to meet important licensee obligations as gatekeepers for offers of investment products and services to retail clients. Where we identify significant harm, we will continue to take strong regulatory action including, where appropriate, commencing court proceedings.”
Meanwhile, Morningstar has copped an almost A$30,000 fine as the latest company to fall foul of Australian ‘greenwashing’ rules.
In a notice handed down last week, the research house and investment manager agreed to pay the A$29,820 fine after ASIC found the Morningstar International Shares (Unhedged) Fund had been exposed to controversial weapons companies in breach of policy documents.
According to the ASIC statement, the Morningstar fund had at various times in 2022 and this year held stocks in five firms involved in the production of controversial weapons despite vowing to exclude the sector in its environmental, social and governance (ESG) product disclosures.
“Morningstar’s ESG research arm, Sustainalytics, identifies that the… [five] companies are involved in controversial weapons, specifically the development or production of nuclear weapons or providing core components for them,” the ASIC release says.
“The Fund was exposed to Honeywell International from 2 November to 18 November 2022, being the date the shareholding was divested after Morningstar had become aware of it. On a subsequent occasion, the Fund was exposed to General Dynamics, Leidos Holdings, Northrop Grumman and Raytheon Technologies securities from 31 May 2023 to 13 June 2023.”
Morningstar self-reported the ESG errors to the regulator, coughing up the fine at the end of November.
“Payment of an infringement notice is not an admission of guilt or liability,” the statement says.
But the Morningstar sting comes on a long tail of anti-greenwash ASIC actions with three cases currently before the courts involving Active Super (formerly Local Government Super), Mercer and Vanguard.