The Australian Securities and Investments Commission (ASIC) has released new information on its Moneysmart website aimed at helping investors understand complex market offerings and encouraging them to give significant consideration before engaging with them.
The new guidance addresses exchange-traded options, futures contracts, fractional share trading and micro-investing. In addition, the existing futures glossary page was reviewed.
The move follows a targeted surveillance by the corporate regulator that examined nine entities offering products such as short-dated options, futures and fractional shares.
The analysis found some providers are using fee-free trading or other incentives, such as cash vouchers, to attract customers. ASIC stated it was of concern these promotions can distract from the underlying investment risks.
ASIC commissioner Simone Constant noted while these offers can seem appealing, they carry their own risks.
“At ASIC, we want to see Australians participating safely in thriving markets. But it is important Australians know that there is no such thing as easy money,” Constant said.
“While sign-up incentives can make trading more exciting, they can distract from investment risks and could encourage impulsive trading decisions.”
The products themselves present considerable dangers, with some using leverage that can amplify outcomes significantly.
The commissioner explained with certain products, “losses can be magnified and accumulate quickly, in a matter of hours or days”.
Other investments, such as fractional shares, may involve complicated ownership arrangements that could affect an investor’s rights and ability to transfer their assets.
Constant’s advice was direct: “If you do not understand how a product generates returns, or how your money is held, do not invest until you do.”
Conducted between March and June, the ASIC review identified specific shortcomings in how some firms operate. These included deficiencies in how some of them defined their target market, with insufficient detail on how the products met client needs.
Onboarding processes were also found to be weak, sometimes allowing clients unlimited attempts to pass questionnaires. Further, it was discovered client disclosures often fail to clearly explain the risks and costs involved.
The regulator’s intervention has already prompted changes, with five entities improving their compliance practices. To this end, two firms have stopped onboarding new options clients and one has exited the Australian market.
ASIC is continuing to address its concerns and is considering further regulatory or enforcement action.