Australia’s financial regulator ASIC has announced that it has revoked the Australian Financial Services (AFS) license of retail over-the-counter (OTC) derivatives issuer XTrade.AU Pty Ltd (XTrade).
XTrade offered clients opportunities to trade in Contracts for Difference (CFDs) and Foreign Exchange Contracts (FX Contracts).
ASIC said it revoked XTrade’s AFS license after its investigation found that a number of vulnerable customers were encouraged to trade CFDs where they could not afford to do so or had limited trading experience resulting in significant losses for some consumers.
ASIC’s investigation found that between June 2018 and September 2022, XTrade failed to comply with its general obligations as an AFS licensee and:
- engage in unconscionable behavior;
- failed to take reasonable steps to ensure that its representatives complied with financial services legislation;
- did not have adequate arrangements to manage conflicts of interest;
- failed to take reasonable steps to ensure that the distribution of retail products was consistent with the identification of the target market;
- did not do everything necessary to ensure that financial services are provided efficiently, honestly and fairly.
ASIC also found that XTrade put its own interests above those of its clients and did not act in good faith, falling short of the standards expected of an AFS licensee.
ASIC further found that XTrade failed to prevent its agents from engaging in misconduct over a number of years and failed to ensure that they had undergone adequate training.
XTrade applied to the Administrative Appeals Tribunal (AAT) on 29 April 2024 for a review and stay of ASIC’s decision to cancel the AFS licence. After an insurance hearing on May 31, 2024, the The AAT dismissed XTrade’s application for a stay. This means that XTrade’s AFS license remains suspended until a final decision is made by the AAT on the substantive review application.
XTrade has held AFS license 343628 since April 12, 2010. XTrade is part of the international XTrade Group. The XTrade Group also operates the XTrade offshore online brokerage brand out of Belize and South Africa through its subsidiary Peak Wealth PTY Ltd, which is licensed by the FSCA of South Africa.
Contracts for difference (CFDs) are derivative leveraged contracts that allow a client to speculate on the change in value of an underlying asset, such as exchange rates, stock indices, individual stocks, commodities or cryptocurrencies.
ASIC noted that it has taken a number of enforcement actions against retail OTC derivatives issuers facing misconduct in the industry, including:
- securing a $75 million penalty against AGM Markets and its authorized dealers OT Markets and Ozifin, along with compensation for approximately 10,000 former clients (20-246MR).
- securing a $20 million penalty against Forex Capital Trading Pty Limited, with its sole director fined $400,000 and banned for eight years;
- commencement of civil penalty proceedings in Federal Court against Union Standard International Group (USGFX) and its former corporate authorized representatives;
- imposing additional conditions on AxiCorp Financial Services Pty Ltd’s AFS license to ensure that it has adequate compliance arrangements in place for its OTC derivatives business; and
- the suspension of the AFS license (23-352MR) and the winding up on just and equitable grounds of Prospero Markets Pty Ltd after it failed to comply with the statutory obligations required of an AFS licensee.
In addition to its enforcement actions, ASIC has also taken regulatory measures to protect consumers from high-risk OTC derivative products, including:
- introducing the CFD Product Intervention Order (PIO) from 29 March 2021, imposing restrictions on CFDs issued and distributed to retail clients (ASIC Corporations (Product Intervention Order – Contracts for Difference) Instrument 2020/986);
- the extension of the CFD PIO until 23 May 2027, which has been effective in reducing the risk of significant harm to retail customers as a result of CFDs (Exhibit 724 Response to submissions on CP 348 Extension of the CFD Product Intervention Order).
- publication of Report 770 Planning and Distribution Obligations: Retail OTC Derivatives on 6 September 2023, which summarizes ASIC’s key observations on how retail OTC derivatives issuers have been meeting these obligations and highlights areas for improvement. and
- overseeing more than $17.4 million in combined compensation payments to more than 2,000 retail customers affected by violations of the Financial Services Act by eight retail OTC derivatives issuers 23-298MR.
Design and distribution obligations also require issuers and distributors of financial products to ensure that products are designed with consumer needs in mind and distributed in a targeted manner. Issuers of financial products are also required to monitor results and reassess their product governance arrangements over time.