The Australian Securities and Investment Commission (ASIC) has revoked the Australian financial services (AFS) license of XTrade.AU Pty Ltd.
Non-Compliance with AFS Obligations
XTrade, a retail over-the-counter (OTC) derivatives issuer offering contracts for difference (CFDs) and foreign exchange contracts (FX contracts), lost its ASIC authorization due to non-compliance with its general obligations as an AFS licensee.
ASIC determined that “several vulnerable clients were encouraged to trade in CFDs despite not being able to afford it or having limited trading experience, leading to significant consumer losses.”
AFS licensees must design and distribute financial products with consumer needs in mind and ensure products are distributed appropriately. They are also required to monitor outcomes and reassess their product governance arrangements over time.
Awaiting Tribunal’s Final Ruling
XTrade has held AFS license 343628 since April 12, 2010. However, ASIC’s investigation revealed that between June 2018 and September 2022, XTrade:
– Engaged in unconscionable conduct;
– Failed to ensure representatives complied with financial services laws;
– Lacked adequate conflict of interest management;
– Did not align retail product distribution with target market determinations;
– Failed to provide financial services efficiently, honestly, and fairly.
The regulator noted that XTrade prioritized its own interests over clients’ and failed to act in good faith. Moreover, the broker did not prevent its representatives from misconduct and did not ensure they received adequate training.
XTrade applied to the Administrative Appeals Tribunal (AAT) on April 29, 2024, for a review and stay of ASIC’s decision. The AAT refused the stay application, leaving XTrade’s AFS license canceled until the AAT’s final decision on the review application.
Australia Tightens CFD Regulations
Contracts for difference (CFDs) are leveraged derivative contracts allowing speculation on the change in the value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities, or crypto-assets.
ASIC has implemented several measures to protect consumers from high-risk OTC derivative products, including:
– Enacting the CFD product intervention order (PIO) from March 29, 2021, which restricts CFDs issued and distributed to retail clients (ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986);
– Extending the CFD PIO until May 23, 2027, effectively reducing significant harm risks to retail clients from CFDs (Report 724 Response to submissions on CP 348 Extension of the CFD product intervention order);
– Releasing Report 770 Design and distribution obligations: Retail OTC derivatives on September 6, 2023, summarizing ASIC’s observations on how issuers meet these obligations and highlighting improvement areas;
– Overseeing more than $17.4 million in combined compensation payments to over 2,000 retail clients affected by financial services law breaches by eight retail OTC derivatives issuers (23-298MR).
Previous Enforcement Actions
Past enforcement actions against retail OTC derivatives issuers include a $75 million penalty against AGM Markets and its authorized representatives OT Markets and Ozifin, a $20 million penalty against Forex Capital Trading Pty Limited, additional conditions on AxiCorp Financial Services Pty Ltd’s AFS license, and the suspension of Prospero Markets’ AFS license.