ASIC warns on hybrid securities

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Australian Securities and Investments Commission is warning investors to be careful of hybrid securities, which make investors take on equity-like risks but only gives them, at best, bond-like returns.  

ASIC has updated information on its consumer finance website, MoneySmart, to help investors understand the risks and complexities of these hybrid securities.

The regulator has also developed a quiz for investors to help them comprehend the terms of these offers and encourage them to be fully informed before they invest.

ASIC’s focus on these complex products follows a rise in their popularity – in the 18 months to July last year, around $18 billion was raised through ASX-listed hybrid securities.

“ASIC is committed to addressing the concerns that these complex products present,” commissioner John Price said.

“Investor education is critical in this work. Investors must think hard about whether hybrids are suitable for them, weigh up the risks, and spread the risk by diversifying.”

In August last year, ASIC published a report on hybrid securities which discussed recent offers of hybrids in Australia and ASIC’s work in response.

After working on improving prospectus disclosure and new investor education resources, ASIC intends to focus on possible misleading conduct in the sale of hybrids.
This includes inappropriate labelling of hybrids, misleading advertisements, and unwarranted comparison of hybrids to different, and less risky products such as covered bonds or senior debt.

ASIC has previously warned investors about risks and complexities of hybrids, and released a report last week warning it intended to crack down on complex products.

The updated information on ASIC’s MoneySmart:

·         Explains the differences between hybrids issued by banks and hybrids offered by other companies
·         Highlights the features and risks of these securities and includes information on the new ‘non-viability’ clauses found in recent bank      hybrids
·         Compares the typical features of two forms of hybrid security – a capital note issued by a bank and a subordinated note issued by a company – to shares, corporate bonds and bank term deposits, to identify the additional risks investors may be taking on
·         Breaks down the common terms found in hybrid prospectuses, so readers can understand what ‘interest deferral’ or ‘loss absorption’ could really mean for them.