A million potential clients, $900b and high-risk assets: The ‘neo brokers’ that have ASIC worried

A million potential clients, $900b and high-risk assets: The ‘neo brokers’ that have ASIC worried
  • PublishedDecember 18, 2023

The new breed of investment and share trading apps targeting retail investors and self-managed super funds are convenient for some but a massive headache for others, including the corporate regulator, which has studied the sector and found mis-selling, mislabelling, and misleading disclosures.

The report by the Australian Securities and Investments Commission (ASIC) paints a picture of an industry that operates like the wild west.

With more than a million clients, and billions of dollars of assets at play, it’s a big concern, particularly if more Australians start shifting their superannuation into self-managed super funds (SMSF) and start trading in high risk assets, such as crypto.

Some neo brokers are starting to target investors to set up SMSFs and come and play.

Last financial year, almost 20,000 net new SMSFs were established, bringing the total to 604,234. Referred to as “selfies,” more than 1.1 million Australians have set up SMSFs and amassed almost $900 billion of assets ranging from shares, cash, property and crypto currencies.

ASIC has had the industry on its radar for the past couple of years, particularly when new operators started to emerge during COVID.

It says it has used an array of tools to clamp down on the industry, including court actions, stop orders, infringement notices and other interventions “to disrupt potentially harmful offers of financial products and services, improve retail investor outcomes and clarify our regulatory expectations with online trading providers”.

In most cases, it declines to name names. But it cites a series of concerns.

Misleading conduct

For instance, one provider was caught withdrawing client money without approval to bankroll its expected daily trading activities with an external trading partner, which is a breach of the law.

It said it found some operators engaging in misleading and deceptive advertising by spruiking low or zero brokerage fees to attract customers only to be slugged a range of other fees and charges.

“We were concerned that some of these claims of ‘zero’ or ‘low-cost’ brokerage were not true to label, particularly where other fees and charges were payable by the client or where the service was ‘bundled’ with other products or services that effectively subsidised the brokerage and caused retail investors to take on additional risk,” ASIC said.

Some providers were caught using the terms “safe” and “secure” or inappropriately using the ASIC logo to promote products and services, which is not allowed, and designed to suggest safety when it isn’t there.

ASIC found that some providers designed platforms that incorporate “behavioural levers” that “unfairly influence consumer decision making” that ASIC says leads to trading that can end in tears.

Shockingly, it said it found several entities had received and held client money in bank accounts in their own names, not the name of the licensee in which it was providing financial services.

“We were concerned that the licensee who had appointed these providers to provide financial services on its behalf did not hold client money directly on trust for the benefit of these clients,” ASIC warns. “This can increase the risk of losses associated with non-permitted withdrawals, fraud and other operational breaches by these online trading providers.”

Lack of compliance

At the heart of the problem is weak internal compliance. It found providers rented financial services licences and according to ASIC “lacked sufficient expertise and understanding of the representatives’ business and operations”.

The most high-profile legal actions it took include civil penalty proceedings against Lanterne Fund Services in the Federal Court, alleging compliance shortcomings in its systems and processes.

ASIC deputy chair Sarah Court said at the time, “Despite Lanterne’s authorised representatives operating under its licence being responsible for over $1 billion in funds and collectively paying monthly fees of around $180,000 to Lanterne during this period, it appears to ASIC that Lanterne operated a wholly deficient business, with no compliance staff and almost no risk management processes in place.”

ASIC also initiated legal action in the Federal Court against eToro Aus Capital, specifically in relation to a contract for difference (CFD) product, alleging breaches of design and distribution obligations and breaches of its licence obligations to act “efficiently, honestly and fairly”.

ASIC alleges that between October 5, 2021 and June 14, 2023, almost 20,000 of eToro’s clients lost money trading CFDs. eToro’s website states that 77 per cent of retail investor accounts lose money when trading CFDs with eToro.

“ASIC is disappointed by the alleged lack of compliance in this case, given eToro’s market penetration and the depth of its brand awareness, both in Australia and globally,” ASIC said in a statement.


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