ASX retail investors should be banned from ‘financial heroin’: Choice

Controversial CFDs are in the spotlight again as temporary restrictions on their sale to retail consumers are about to be lifted.

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Consumer lobby group Choice has called for contracts for difference (CFDs) to be banned to retail investors.

CFDs effectively bet on the changing value of an asset without actually owning the asset itself. These products, offered by many stockbrokers, can be linked to all sorts of assets — shares, stock market indices, foreign currency, commodities, and now cryptocurrencies.

They are usually highly leveraged, meaning potential losses can be far greater than the initial outlay.

Although they are also used by professionals to hedge risk, they can land inexperienced retail investors in trouble due to the big debts involved.

In a 2020 court case, the Federal Court’s Justice Jonathan Beach criticised the heavy debts in CFDs that entrap “unsophisticated retail investors” seeking “financial heroin hits”.

High pressure sales tactics are also used by some brokers to peddle CFDs to vulnerable consumers.

Ban CFDs to retail investors, simple

The court ruling fined three trading firms for “unconscionable conduct” for aggressively selling CFDs. 

That same year the Australian Securities and Investments Commission (ASIC) moved to place temporary limits on such products.

However, that product intervention order expires in May. Choice is urgently calling on its renewal until 2031, or for an outright ban for retail investors.

“If the order is not renewed, consumers would risk potentially losing billions of dollars in CFD losses as seen in 2020,” read Choice’s submission to ASIC.

“CFD issuers would be allowed to resume unfair trading practices, including being able to sell highly-leveraged financial products to retail consumers.”

Both the United States and Hong Kong have banned the sale of CFDs to retail investors. Other jurisdictions like the United Kingdom have restrictions on what can be offered to everyday consumers.

“Choice believes the sale of CFDs to retail clients has limited, if any, public benefit,” stated the Choice submission. 

“Given the widespread harm identified by ASIC, Choice recommends that the sale of CFDs to retail clients be banned.”

Current restrictions protecting retail consumers

Choice quoted ASIC’s own numbers to demonstrate how effective the temporary restrictions have been:

  • 94% drop in retail net losses, from $377 million to $22 million
  • 50% drop in average retail account loss from $1,962 to $986

“CFDs are precisely the kind of financial product that should be subject to market-wide product interventions.”

ASIC’s current product intervention order will only be extended with a green light from the federal minister for financial services Jane Hume.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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