14.02 2014

ASIC Report 384 – Regulating Complex Products

The Australian Securities and Investment Commission (ASIC) have reviewed its approach to regulating complex products.


What is a complex product?


A complex product can involve specific complex features (such as embedded leverage or inverse returns), and generally have a complex structure, both of which make it difficult for investors to understand and assess the products potential performance and risks.  ASIC considers (among others) agribusiness managed investment schemes, hedge funds and hybrid securities to be complex products.


What did the review cover?


On Friday 31 January 2014, ASIC published Report 384 ‘Regulating complex products’ (Report), outlining the risks posed by such products to retail investors and detailed issues it considers may require further guidance.


ASIC considers the Report and issues timely, noting that the ‘low yield environment and non-trending equity market over recent years has contributed to the development of new products that have the potential to introduce new types of complexity.’  The Report regarded financial advice as increasingly critical where investors may have difficulty in assessing the risks associated with the product.  Further, ASIC’s recent stakeholder survey revealed that the majority of the respondents (including industry, investors and consumers, and financial literacy specialists) believed that Australian investors did not understand the risks associated with complex products (ASIC Stakeholder Survey 2013, p. 28).


What changes can we expect?


ASIC is considering issuing further guidance on:

  • its expectations of product issuers when developing complex products in the future;
  • its expectations of product issuers in relation to the provision of time-critical post-sale information about complex products; and
  • whether there is scope to require disaggregated cost and value disclosure investors.


ASIC is also exploring the potential for using investor self-assessment tools to assist investors in testing their understanding of particular products before investing.


Our opinion


While educational tools and information continue to be valuable sources for potential investors; stricter ASIC requirements in relation to complex products may ultimately result in greater compliance costs for product issuers.  There may also be a danger of complex products being oversimplified or understated to the market, in a bid to meet these stricter requirements.  Further, that even with increased disclosure the risk remains that investors may still make misinformed, risky investment decisions.  Ultimately, the responsibility of the potential investor to seek financial advice cannot be undermined.


ASIC Feedback


ASIC is seeking feedback on the issues raised in the Report, and in particular, views on:

  • the risks posed to investors by complexity in financial products, and the extent of those risks; and
  • the options for mitigating these risks, including the opportunities for further work identified in the Report.


Feedback is requested by 31 March 2014.  For more information on ASIC’s regulation of complex products, please contact Glenn Vassallo or Scott Standen.


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