ASIC REP 828: The Risks of Running a Retail CFD Business

ASIC’s recent REP 828 – Risky Business: Driving change in CFD issuers’ distribution practices could, for CFD issuers, just as easily be called Risky Business: Running a retail CFD business in a DDO and PIO world.

ASIC states it has driven significant uplift across the CFD industry, particularly in relation to target market determinations (“TMDs”) and distribution frameworks. It is clear the sector is now more compliant than ever, with fewer retail clients trading CFDs.

ASIC cites what they saw as “widespread weaknesses” across the sector, in relation to distribution practices and compliance measures.

In our experience, many of our clients worked hard to ensure that they met an evolving list of requirements and expectations from ASIC throughout the review period.

What is clear is that ASIC is still looking at this sector

We’ve identified a few potential areas of further thematic review, including some questions every CFD issuer should be asking.

1.  Are we undertaking the monitoring we told ASIC we would?

ASIC’s expectations around monitoring are now well established. REP 828 reinforces that issuers are expected to conduct ongoing, meaningful monitoring of client outcomes, distribution behaviour, and product performance against the TMD.

For some issuers, early focus was placed heavily on drafting TMDs, with less emphasis on how monitoring would operate over time. ASIC expects monitoring to be continuous and relevant, with clear evidence that it is occurring in practice.

2.  When data is collected, is it being used to inform decisions?

REP 828 highlights that collecting data alone is not sufficient. Where monitoring identifies trends or potential concerns, issuers are expected to review that information and consider whether action is required.

It is important to recognise that client losses, by themselves, do not mean a target market is inappropriate—losses are an inherent feature of CFD trading. However, issuers should be able to demonstrate that outcomes have been assessed against the intended target market and that the rationale for maintaining or adjusting a TMD is clearly documented.

3.  Are exotic or option CFDs and other derivatives being offered to retail, and are they commercially important?

ASIC has identified option CFDs and certain “exotic” CFDs (and other derivative products) as areas of concern, reflecting their increased complexity and risk profile.

Many issuers do not offer these products, and for those that do, they often represent a relatively small part of overall activity. Issuers offering such products should be mindful that they may attract closer regulatory attention and contagion risk where a relatively unimportant product offering can lead to extensive, wider engagement with ASIC.

4.  Are wholesale clients genuinely wholesale?

Wholesale client classification remains an area of focus for ASIC.

Where wholesale classification is used, issuers should be comfortable that the basis for that classification is defensible and reflects genuine client capability, rather than operating as a distribution mechanism to avoid retail obligations.

Some wholesale clients tests are highly dependent on procedural accuracy. There are several important steps in the process that need to be satisfied, for those classifications to be valid.

If your largest loss-making wholesale client approached AFCA claiming to be retail, would they have any valid arguments? We have seen many deficiencies in this area, and we strongly recommend a periodic review of wholesale client onboarding policies.

5.  Do distribution arrangements introduce additional risk?

Distribution outcomes always remain with the issuer, regardless of whether third parties are involved.

The use of IBs or other distribution partners adds complexity. ASIC expects issuers to maintain appropriate oversight of these arrangements and to ensure distribution practices remain consistent with the TMD.

In this sector, we often see either poorly documented distribution arrangements or agreements that no longer reflect commercial realities. Tidying up these arrangements and tightening contractual controls can be a relatively simple process.

If you have any questions, feel free to contact our team.

Author: Greg Patton (Special Counsel)