Report from Australia: ASIC to assume a more aggressive stance in 2017

Chris Lee

The Asia Pacific region is, perhaps, one of the largest, most diverse, and most misunderstood markets in the world. Retail forex trading has finally expanded beyond the major developed markets in the area to encompass many of the emerging market countries, as well. Home to nearly fifty independent nations, having a combined population that exceeds half of that of the world, the Asia Pacific (AP) market continues to be a success story in progress.

How does one deal with such diversity, where technology and economic development are experiencing widely varying degrees of homogeneity? One must be cautious and due diligent in all decision making, which, unfortunately, may not be face-to-face due to the incredible distances involved. While nearly all countries resident in the region are highly dependent on international trade, only a few of the major players allow their currencies to float freely on the Interbank exchange. Choosing a reliable and trusted broker can be a challenge, even in the developed markets, and the anonymity of the Internet plays right into the hands of those with fraudulent intent on their minds.

Which nation is trusted above all others? Executives have flocked to Australia because, as one analyst noted, “Australia has marked itself out in recent years as a very attractive part of the world in which to establish a retail FX firm, or to open a branch of an established company from overseas.” Australia offered a very stable financial market economy, excellent business ethic, and all within the purview of a “secure regulatory environment under the auspices of the technologically advanced and ultra-modern Australian Securities and Investments Commission (ASIC).”


Australia also sports the highest GDP per capita in the region, but resource and jurisdictional issues make it impossible for the regulator to police much of anything outside of its domestic borders. As a result, a number of embarrassing situations have emerged over the past few years that have tarnished the agency’s reputation and made it more resolute than ever to push back with a vengeance going forward. The word on the street is that ASIC will be clamping down hard on forex brokers in 2017, with a primary focus on CFDs and binary option dealers.

What are some of the problems that have recently surfaced in the region?

As some have already reported in the press, “2016 was not a good year for ASIC.” Despite the protestations of Greg Medcraft, Chairman of ASIC, that his agency had delivered the goods, those in the know discounted his efforts, as only jailing a few small fry, while “the big end of town has barely been touched.” During the early part of the year, the agency was embroiled in litigation over mortgage rate fixing with a number of high profile banks, while also dealing with Comminsure, an insurance firm that allegedly defrauded consumers out of legitimate claims.

Attacking a few banks in court is not an easy proposition. Many in the regulatory industry viewed these attempts as futile. The normal course that others regulators had pursued was to assess fines upward of USD$10 billion for such transgressions. Hit them where it hurts, so to speak, and dispense with civil actions that lead nowhere, especially when the opposition can afford the best attorneys available. Public censure followed when the government published its “capability review”, in which it was determined “that ASIC was a dysfunctional, overworked and under-resourced organization.”

To Metcraft’s credit, he was not summarily discharged. He was given eighteen months to clean up the mess and get his house in order. The hits, however, did not stop coming. The major banks in town were found guilty again of shady mortgage practices and bilking investment clients for guidance fees, when no advice was ever forthcoming. Metcraft blamed the frauds upon what he termed as “cultural factors”, where existing staff deliberately ignored the entreaties from senior management, a growing issue in many large organizations that are deemed as too big to fail.

Despite being pulled in several other directions, foreign exchange scandals were not prevalent in the news until the latter part of the year. ASIC fined a few banks for A$2.5 million apiece for “manipulation of wholesale spot foreign exchange (FX) rates.” Critics viewed the fines as “feathery”, a flashback to Medcraft’s public notions that, “You have to have penalties which actually hurt. They can’t be a feather.” The same critic noted, “Feathery fines of a few million dollars will hardly cause the big banks to “hurt”, unless it’s from laughing.”

If this were the end of the story for last year, it would be quite a rebuke of ASIC and its inability to fulfill its mission. Unfortunately, a new scandal is coming to light regarding the issuance of an Australian Financial Services License (AFSL). ASIC has put a hold on issuing this type of license because of “criminals selling the wrong category of license to

Chinese companies” for as much as $1 million, claiming that it authorized the right to operate as a foreign exchange broker. ASIC’s reaction – More proactive scrutiny of existing forex brokers will be the order of the day in 2017.” Per Medcraft’s public admonishment, “What we want for people to appreciate is that there is nowhere to hide.”

ASIC has already caused apprehension in the forex broker ranks in 2017.

The stereotypical Aussie is known to never back away from a challenge or a fight, and Greg Medcraft, true to his national character, came to a recent iFX EXPO in Hong Kong with all guns blazing. He boasted of expanded intervention powers that had been granted to ASIC, along with new resources and staff, which will allow his team to focus on “complex products such as Contracts for Difference (CFD), and tidying up the financial services industry.”

It will now be a waiting game to see exactly how this aggressive stance plays out in 2017 for the Australian retail CFD and foreign exchange industry. ASIC has not been ignoring this sector of the market. Scrutiny has expanded as the level of customer complaints escalated in recent years. This past December, the Australian Government published a new proposal paper entitled, “Design and Distribution Obligations and Product Intervention Power”, which would give ASIC the power to intervene on a selected basis various high risk products in the industry and make necessary changes as follows:

  • “Amendments to marketing and disclosure materials for a product;
  • Warnings to consumers, and labeling or terminology changes in relation to a product;
  • Restrictions on how a product is distributed; and
  • Product banning (only under extreme circumstances).”

At this stage, these new powers are in proposal form with a comment period attached that ends in March. Implementation may actually be delayed until later in the current year, which may also coincide with Medcraft’s contractual departure from the agency in November. In any event, the stage has been set and ample warning given that ASIC will, as Medcraft has promised, punish any “bank ‘subcultures’ failing to get the message.”

Will ASIC follow the recent directives of the FCA in the UK to limit leverage?

ASIC staffers will have their hands full in 2017, implementing new rules and stepping up surveillance activities in the forex industry. To their credit, they have put the rate fixing scandals behind them after censuring National Bank of Australia and Commonwealth Bank of Australia and assessing fines that many felt were paltry at best.

The issue in China related to the fraudulent selling of AFSL licenses is problematic to a degree. The agency is very limited in what it can do to police this activity, due to jurisdictional issues. It can shut down websites in Australia and restrict the issuance of new licenses, but, as for China, there is only so much anyone can do. Per one reporter, “This highlights the lack of jurisdiction any nation has over China, which technically has its own, completely other-worldly Internet and is irrelevant to Google or any rulings anywhere else in the world.” This problem, however, will persist, as one compliance executive has noted: “These companies have Australian responsible managers and directors so it’s a huge risk for the industry.”

The raised apprehension level in the forex industry, nevertheless, has more to do with how current operations may be impacted if an entire series of new regulations come down, as is transpiring in the UK. In some respects, ASIC has always been regarded as a stepchild of the FCA, following its strict guidance procedures and modeling its agenda in a similar fashion. As a result, ASIC is highly regarded as a very credible organization, the reason why its regulatory structure is accepted as a ”bastion of reliability among Chinese partners and investors alike, who are conservative and ultimately concerned with the security of their often very large portfolios.”

The new regs proposed by the FCA attack the industry where it hurts most by limiting leverage and curtailing bonus strategies designed to temp new clients to join the fold. Brokers can deal with the bonus issue, but leverage limits would severely crimp revenue streams, lower profitability, and encourage customers to migrate to overseas competitors. When the proposed rules were announced in the UK press, brokers traded on public exchanges suffered major sell offs of their shares, losing roughly 20% of their respective market capitalizations in the process.

Will ASIC follow suit in Australia? The legislation that gave rise to ASIC in 2001 does not provide the latitude for agency officials to limit leverage to “50:1” for experienced traders and “25:1” for beginners, according to industry insiders that have studied the matter. The new proposal released in December, however, may be paving the way to make such changes, or, as Medcraft has assured many in the industry, provide an avenue for “fine tuning” inappropriate products that present elevated risk for investors. Time will tell.

Concluding Remarks

The Asia Pacific region has often been characterized as innovative and brimming with entrepreneurial spirit, but the “Wild West” nature of the market can also provide a home for those with criminal intent on their minds. ASIC has definitely been a “bastion of reliability” in an immense ocean of market participants. Like many of its brethren in the West, it, too, was blindsided by the forex rate-fixing scandals that took place at our major banking institutions, and it has had to learn the hard way how to be more responsive and adapt in this new electronic age.

2017 will be a transformative year for the agency and for the foreign exchange industry in the region. The competitive landscape will change, hopefully, for the better. Stay cautious

Chris Lee

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