Tony D'Aloisio. Photo: Rob Homer
The state of play is not to ban complex products, but debate is important.
AT THE ASIC Summer School, financial commentator Paul Clitheroe, in answer to a question on whether complex retail investment products should be prohibited and retail investors not given a choice to assume risk in those products replied: "I don't like prohibition. It didn't work for alcohol and I am not sure it will work for investment." Other commentators have advocated the banning of certain products (for instance, contracts for difference and collateralised debt obligations) for retail investors and a wider role for the Australian Securities and Investments Commission to "red flag" them.
The current approach of the Corporations Act lines up with the body of economic thought around the "efficient markets hypothesis". Namely, the act allows markets to operate with a minimum of regulation and oversight (essentially around disclosure and prohibiting certain conduct that is misleading or deceiving).
ASIC's role as an oversight body can be likened to a road traffic authority or police force. Basically, ASIC oversees and enforces the laws and couples that with extensive work so that investors receive clear disclosure and have the knowledge to make informed choices. We do this, for example, through our recent work developing shorter product disclosure statements and through financial literacy initiatives such as the FIDO website that has received more than 2 million unique visitors this year. The relevant laws are self-executing, in the sense that those operating in these markets need to make sure they comply with those laws. ASIC is not a guarantor of last resort.
ASIC's oversight and enforcement work is important and ASIC has achieved a great deal in helping retail investors within its regulatory remit.
On disclosure: ASIC has pushed the disclosure regime to the limit. Examples include our work on unlisted and unrated debentures, and unlisted property and mortgage trusts, where ASIC introduced the ''if not why not?'' disclosure regime to push for clear benchmarks so retail investors can make more risk-informed choices.
On guidance: Through the use of initiatives such as ''investing between the flags'' and product risk analysis using our FIDO website, we have provided important guidance to retail investors. This guidance is backed up with a range of calculators that allow investors to compare managed products and scenarios to help optimise their choices.
On enforcement: ASIC takes numerous proceedings to deter illegal conduct. These range from bannings and winding up unregistered managed investment schemes through to recent record numbers of criminal proceedings against those involved in market manipulation, such as insider trading, which prejudice the interests of retail investors.
On compensation: Where retail investors have lost their money through collapses, ASIC has made recovering losses our key priority. For example, through the efforts of ASIC and the liquidators, investors so far have seen the return of about $100 million of the $388 million invested in Westpoint and $250 million with Opus Prime. We've also significantly expanded access for retail investors to free and independent dispute resolution such as the Financial Ombudsman Scheme - especially for complaints involving financial advisers.
But this does not alter the fact that in the recent crisis we have seen retail investor losses from the falls in the markets and from collapses such as Storm Financial. Nor does it alter the fact that we are increasingly seeing complex products, such CDOs, CFDs and even hedge funds, marketed to retail investors, who often borrow to invest, but do not always have the knowledge and skills to invest with safety or in an informed way.
These losses have prompted calls for ASIC to be more active in preventing losses and to possibly ban some products or apply suitability tests or warnings.
In terms of being more proactive, ASIC has reviewed these losses to see where it could improve. A particular focus in our work is to enable retail investors to understand concepts such as risk/reward premium and asset diversification.
In the end, however, the existing regime is one where risk-taking will mean retail investor losses will occur from time to time. They are inevitable and retail investors cannot expect ASIC to be at every intersection or dangerous bend in the road.
Our current system of retail investor protection has fared better than many of its overseas counterparts.
Whether further protection should be given in the form of prohibition of products, or "red flagging", is a policy matter for government and the community. It is an important debate.
At present, the view prevailing is that expressed by Paul Clitheroe - retail investors should be allowed to make their own choices.
ASIC's job is to push the regulatory remit to the limit, as we have been doing, to arm retail investors to make those choices. It is not to prohibit, or "red flag", products. This debate, however, should continue, particularly as we move into a new cycle that will inevitably bring new, complex products and new risks for retail investors.
Tony D'Aloisio is chairman of the Australian Securities and Investments Commission.
