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ASIC engages in risky categorisation of financial products

The Australian Securities & Investments Commission (ASIC) has outlined a novel proposal to begin classifying investments in certain financial products as either “between the flags” or “outside the flags”.

Investing in so-called low risk investments, such as bank deposits, superannuation, blue-chip shares and plain vanilla managed funds, will be classified by the financial equivalent of “swimming between the flags”.

However, investing in financial products that are supposedly riskier, such as complex, illiquid, undiversified investments or leveraged products, will be akin to “swimming outside the flags”.

While the campaign is intended to assist retail investors to better analyse possible risks before they make an investment, simply splitting investments into two generic categories could present some real dangers for unwary investors.

One of the key dangers is that investors could perceive a classification of “between the flags” as an endorsement of a particular financial product. 

Recent market experience has shown that in difficult economic times even blue-chip shares can quickly spiral towards being worthless and governments can be forced to scramble to guarantee seemingly secure bank deposits.

Retail investors would also need to be wary of following ASIC’s classification system if they desire higher returns.

If an investor simply follows ASIC’s classification system and invests solely in “between the flags” products, the resulting returns are unlikely to equal returns that can be achieved through diversification of investment between low risk and high risk investments.

While it is very important that investors, and particularly retail investors, properly understand the risks associated with any investment, ASIC needs to recognise that classifying financial products as “between the flags” could have a significant impact on retail investors.  As a result, ASIC may find itself unintentionally endorsing investments with less obvious risks.

That ASIC is taking such an interventionist step is interesting in itself.  ASIC’s primary role is to regulate Australia’s corporations, markets and financial services providers.  While ASIC's proposal appears to be motivated by a desire to improve the financial literacy of retail investors there is a real risk of confusion between ASIC's role as regulator and educator. 

Retail investors may be better served by seeking appropriate and independent financial advice.

Please contact Geoff Green on 03 8319 1866 or at geoff.green@bsglegal.com.au or Lynne Grant on 03 8319 1862 or at lynne.grant@bsglegal.com.au for further information.



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