Back to school: ASIC proposes exam for all investors in complex or risky financial products

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

Medcraft told The Australian Financial Review he 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. The tests would examine 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.

“We have to start thinking about tools for investors which are not just disclosure,” Medcraft told the newspaper.

“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.”

The ASIC proposal follows the collapses of Banksia Securities, Trio Capital and MF Global, which hit many investors hard.

Medcraft was not available this morning for comment.

However, a spokesperson for ASIC said retail investors have a wide range of investment products to choose from and in addition to “plain vanilla products” such as equities and bonds retail investors can invest in complex products such as ETFs, CFDs and hybrids as well as hedge funds.

“More complex products means greater risks and greater potential losses for Australian investors,” says the spokesperson.

Tracey Lyons, director of market operations and retail at The Australian Financial Markets Association, says a test may impose more costs on the industry.

“There are a lot of potential issues as to how it is any investor would go about preparing for any kind of examination and obviously there are cost issues associated with that at the moment,” she says.

“There are significant reforms coming through FOFA and perhaps those reforms should be given time to bed down and have effect before consideration is given to any reforms in this area, specifically the best interest duty will have an impact on the advice given to retail customers.”

Lyons says it is difficult to say whether capital raising will get caught up in the proposed examination regime.

“It is not out of the question but we have no idea what the potential scope of this could be at this stage,” she says.

This piece was first published on LeadingCompany’s sister site, SmartCompany.


Notify of
Inline Feedbacks
View all comments