ASIC issues first DDO stop order for failure to take reasonable steps in CFD distribution

ASIC has made an interim stop order preventing Mitrade Global Pty Ltd (Mitrade) from opening trading accounts or dealing in contracts for difference (CFDs) or margin foreign exchange contracts (margin FX) to retail investors. ASIC’s action was in response to concerns that Mitrade failed to take reasonable steps likely to result in distribution conduct being consistent with its target market determination (TMD).

This action is ASIC’s first use of its stop order powers in response to a contravention of the reasonable steps obligations regarding a financial product since the design and distribution obligations (DDO) took effect in October 2021.

ASIC was concerned that Mitrade relied on a retail investor questionnaire with significant flaws as a key step for compliance with its obligations. When applying for a trading account, Mitrade’s questionnaire gave prompts to a prospective retail investor to review any ‘unacceptable answer’ that would indicate that the investor was not likely to be in the target market for the products. Further, Mitrade allowed retail investors unlimited attempts to pass the questionnaire.

ASIC was also concerned that Mitrade’s steps to reduce the likelihood of distribution conduct being inconsistent with the TMD included inadequate assessment of whether retail investors were likely to be in the target market for the CFDs, in the questionnaire or otherwise. ASIC considered that Mitrade’s questionnaire:

did not adequately enquire into the objectives and needs of retail investors to enable Mitrade to adequately assess whether the investors are likely to be in the target market described in its TMD for the complex, high-risk, leveraged CFDs and margin FX products; and
lacked the degree of specificity required to adequately assess whether distribution to retail investors would likely be consistent with Mitrade’s target market criteria on knowledge and experience, in relation to CFD and margin FX trading.
Under DDO, an issuer and distributors of a financial product must take reasonable steps that will, or are reasonably likely to, result in distribution conduct relating to retail investors being consistent with the TMD for the product.

The interim stop order is valid for 21 days unless revoked earlier. ASIC made the interim order to protect retail investors from acquiring CFDs or margin FX from Mitrade, where those products may not be suitable for their financial objectives, situation or needs. The order does not prevent Mitrade’s existing clients from varying or closing their CFD positions.

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