want to invest? take the asic test

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    Want to invest? Take the ASIC test
    PUBLISHED: 13 Dec 2012 21:30:00 | UPDATED: 14 Dec 2012 04:08:17

    Patrick Durkin

    Investors would be required to pass an online exam before investing in complex or risky products in the wake of the Banksia Securities, Trio Capital and MF Global collapses, under a proposal by Greg Medcraft, the chairman of the Australian Securities and Investments Commission.

    Mr Medcraft believes existing disclosure documents are no longer effective and new technology and innovative approaches are needed to protect investors.

    Investors would be required to take “e-learning module” tests that could take up to two hours. They would test investors’ knowledge of financial products including margin loans, contracts for difference, derivatives and hybrid securities.

    Potential investors could be shut out for 30 days if they failed the exam, which would have password protection to stop cheating.

    The radical proposal, which would need government approval, is likely to upset many in the heavily regulated industry.

    Mr Medcraft said the current system was not working and the issue would be his key priority in his additional role as chairman of the International Organisation of Securities Commissions next year.

    Disclosure alone is no longer enough

    “We have to start thinking about tools for investors which are not just disclosure,” Mr Medcraft told The Australian Financial Review in an interview about his priorities for the year ahead.

    “PDS [product disclosure documents] are not working for some [investors] and often it is not because they don’t understand, they just don’t have time. We are in a world where everyone is busy and I think we just have to start thinking more creatively.”

    Andy Merry, the managing director of LCG Markets, a subsidiary of one of the UK’s largest providers of CFDs, questioned the need for more restrictions on customers.

    “In terms of investors doing a sit-down online test, given the fact that they have introduced a client qualification test, it just seems like overkill,” he said.

    Concern about protections for retail investors grew after financial group Banksia Securities collapsed owing $650 million. Its prospectuses disclosed risks but largely went unread by its 3000 rural clients.

    “We know it is about mobile and video, therefore if you want to sell a retail financial product we need to be thinking about using those tools more because that is the way of the future,” Mr Medcraft said.

    More Creative methods needed to get through to investors

    “If you know that people aren’t reading it, then you have to think more creatively to make sure that people actually know what they are buying.”

    The corporate regulator said whether the test could be made compulsory was a matter for the government and he wanted the exam pushed by the industry as best practice.

    The Australian Financial Markets Association, which represents major stockbrokers and investment banks, is set to release new standards on complex financial products requiring sign-off by senior management before they can be sold to retail investors.

    AFMA chief executive David Lynch said the online test might impose extra costs on the industry.

    “There would be practical issues ... there are questions about what products it would apply to and exactly how it would work,” he said.

    The federal government has introduced laws requiring a suitability test for margin loans. ASIC requires a client qualification test for CFDs, which are banned for retail investors in the US. The risky products have grown 300 per cent to 40,000 investors in Australia in five years.

    Mr Medcraft said it would be “very interesting to watch” how new powers given to UK regulators to ban complex financial products would work.

    “I think you have to look at measures to ensure the wrong products don’t get into the market so that you don’t have to ban them,” he said.

    Investors stop processing information after a few pages

    The plan was backed by a behavioural expert from Deakin University, Paul Harrison, who discussed the issue with Mr Medcraft last month. Dr Harrison said international studies revealed investors stopped processing information after a few pages.

    “PDSs are built around a legal model rather than a human processing module.Everybody has limited and finite processing capacity and an 80-page or even 10-page document can be overwhelming. And many people assume that because it is a legal document it must be a safe document,” he said.

    Separately, ASIC said Future Fund chairman David Gonski and the head of Google Australia and New Zealand, Nick Leeder, were among new appointments to its external advisory panel.

    The regulator said yesterday it had also introduced a new surveillance system to replace its SMARTS system which the federal government has allocated $38 million in the budget but will be passed onto industry.

    “The ability to mine trading particularly high frequency trading certainly strengthens our regulatory tools ... it can identify unusual patterns and go in and investigate,” he said.

    Another ASIC priority for the year ahead is a review of the shadow banking sector following the Banksia collapse, including new mandatory capital requirements.

    “We are going to focus on shadow banking where there are entities offering to provide liquidity but have a mis-match between their assets and liabilities [and] where there are gaps between the securities and banking regulator space,” he said.
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