Assurance et réassurance
One area of focus for the financial services conduct regulator, the Australian Securities & Investments Commission (ASIC), has been a retail sector clean up in the area of over-the-counter (OTC) derivative products including contracts for difference (CFDs) and foreign exchange contracts, particularly following the Financial Services Royal Commission which concluded in February 2019. Put simply, a CFD is an agreement that allows an investor to bet on whether the value of an underlying asset (such as a foreign currency) will increase or decrease. CFDs are considered to be notoriously volatile, complex and risky financial products.
In a landmark penalty decision delivered by his Honour Justice Beach of the Federal Court on 16 October 2020, ASIC succeeded in obtaining extraordinary pecuniary penalties totalling AUD75 million against three related corporations (AGM Markets Pty Limited, OT Markets Pty Limited and Ozifin Tech Pty Limited) who operated a business providing OTC derivative products to retail investors in Australia, including CFDs.
The case is significant because of the extraordinary scale of the pecuniary penalties awarded and the large number of contraventions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) accepted by Justice Beach – in excess of 10,000. The substantial penalties reflect the gravity of the contraventions and Justice Beach's desire to send a clear message to participants in the market.
Justice Beach was highly critical of the defendants' egregious conduct and the broader OTC derivative trading industry, likening the products to "financial heroin hits" for vulnerable investors.
In February 2020 Justice Beach found the three defendants had engaged in systemic unconscionable conduct including in relation to the provision of personal financial advice to clients and advice that was not in the clients' best interests. That advice was provided by account managers who were based in foreign jurisdictions.
Perhaps the most egregious finding was that account managers engaged on behalf of OT Markets Pty Limited were instructed to “kill your customers” – a direction to account managers to encourage clients to increase investments, trades and ultimately lose money. The motive for this was clear as client losses translated to revenue for the defendants.
It was also found that the defendants made misleading representations to their clients, whom Justice Beach described as "unsophisticated and ill-informed speculators", including with respect to the inherent risks of investing in derivative products.
In addition to the sizeable penalties, the defendants were ordered to make financial redress by refunding client deposits, with client losses equating to AUD32 million.
Separately to the proceeding, AGM Market's director was banned from providing financial services for a period of 8 years and all three of the corporations were forcibly wound up, with AGM Markets being stripped of its financial services licence.
The case is just one part of ASIC's broader crusade against the OTC retail derivative trading market. ASIC reviews conducted in 2017, 2019 and 2020 reported that most retail clients lose money trading CFDs. Following industry consultation, shortly subsequent to Justice Beach's penalty judgment, ASIC made a product intervention order imposing conditions on the issue and distribution of CFDs to retail clients, effective from 29 March 2021. The merits of ASIC's overall approach to intervention were enthusiastically endorsed by Justice Beach.