ASIC puts investors to the test

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The two-hour online e-module would test investors’ knowledge of financial products including margin loans, contracts for difference, derivatives and hybrid securities.

The test, suggested by ASIC chairman Greg Medcraft, comes after the collapse of Banksia Securities, Trio Capital and MF Global.

Medcraft said it was to assess whether product disclosure statements (PDS) were actually understood by investors, and whether they were enough to protect them from making poor investments.

Anyone wanting to invest in risky or complex products, such as ETFs, CFDs, hybrids and hedge funds for example, will have to undertake the test, said a spokesperson for ASIC.

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

Medcraft wants the exam pushed by the industry as best practise but said making it compulsory was up to the government.

“If the goal of a product disclosure statement is to help consumers make the most appropriate choices, we have to begin with the consumer,” said Paul Harrison, senior lecturer for Graduate School of Business – Deakin University.

“We know that people are busy. We know that people take risks. We know that taking risks is not always a bad thing. And as Medcraft says, we know that most people don’t read the PDS, or terms and conditions, or the fine print,” said Harrison.

He suggests a due diligence or stress-testing process for regulations and standards, with behavioural specialists.

“Products should also go through a due-diligence process or a product piloting. In the same way that a marketer would go through a piloting process to see if people would buy their product, maybe some financial products should go through a piloting process to see if they might cause harm.”

Harrison’s full article can be found on Wealth Professional here.

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  • Steve Varhegyi on 18/12/2012 12:24:18 PM

    Hooray!!! Finally investors to take some responsibility for their own actions. No longer would they be able to plead total ignorance of the risks involved in investing. Next step, an education course and exam for SMSF trustees, including how to put together a sound investment strategy, sole purpose test, typical breaches resulting in non-compliance etc. Surprising this hasn't been made a prerequisite for anyone wanting to run their own fund.

  • Fred Jones on 18/12/2012 9:55:26 AM

    So the PDS does not work because people are too busy to read it. At what point does "Caveat Emptor" come in?

  • Darryl Gobbett on 18/12/2012 9:50:57 AM

    Similar tests on competency should be in place for public servants and politicians so we can be comfortable they have the appropriate qualifications, competencies and experiences to make and implement the laws that affect us all. Or is this again one rule for us and another rule for them?

  • Mel on 18/12/2012 9:39:33 AM

    Or, we could make these products only available through licensed financial advisers?

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