ASIC’s new focus: False safety for clients

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In its latest report, ASIC has highlighted concerns that advisers could be mis-selling products labelled as ‘capital protected’ to unaware clients.

The regulator says concerns have been raised here and overseas about potentially misleading or unhelpful claims of “conditional protection”. ASIC commissioner Peter Kell said, “Given the attraction of investments that offer to protect or guarantee investors’ capital while simultaneously offering yield there is a risk that they may be mis-sold.”

Report 340 ‘Capital protected’ and ‘capital guaranteed’ retail structured products addressed problem areas around:

  • The accuracy and balance of advertising for these products
  • The labelling and description of reverse convertible products as offering ‘conditional capital protection’ or ‘conditional protection’. The value of these investments is usually linked to the worst performing reference share, meaning investors could lose some or all of their money, and
  • Certain ‘internally geared’ structured products that are described as entailing a compulsory capital protected loan, where all of the investor’s outlay is at risk of loss if reference assets don’t perform. Where the investment exposure is ‘notional’, there may also be risks for investors who claim tax deductions on their payments

“ASIC will be focusing on the use of terms such as ‘protected’ that create a perception of safety where this is actually inconsistent with the underlying risks of some of these products,” said Kell.

“Such claims can have a powerful influence on the decision of investors, and we expect product issuers and financial advisers to ensure claims are consistent with the features of these investments, so investors can make informed decisions.

“Where advertising is misleading as to a product’s nature or features, or the advice provided to consumers does not appropriately outline the risks, we will take action.”

The report said that in some cases, advisers may have also encouraged retail investors to claim tax deductions on internally geared products that do not have an ATO product ruling. “While rulings are not mandatory, some of these products and investments may be at risk of being viewed as tax avoidance schemes. The ATO has issued a number of public warnings to this effect,” ASIC said in the report.

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