Asic to ban or restrict investment products which lose customers $2bn a year

The corporate regulator says it will ban or restrict the sale of two exotic investment products that cost customers almost $2bn a year.

Using new product intervention powers gained in April, the Australian Securities and Investments Commission wants to ban the sale of binary options to ordinary Australians for 18 months – the maximum period allowed under the law.

It also plans to dramatically reduce the amount of leverage allowed on contracts for difference, or “spread betting”, from as much as 500 to one to as little as two to one. Firms will also be banned from allowing clients to get into a position where they owe the company money.

A binary option is a bet on whether a share price or other financial indicator will go up or down while a contract for difference involves picking both the direction and size of the movement.

There are 65 firms offering one or both of the products licensed in Australia, including the London-listed IG Markets and CMC Markets, US giant FXCM and home-grown outfit Pepperstone.

Despite their exotic nature, the products are heavily promoted through a network of introducers and through internet advertising including on dating sites. They are extremely popular with retail investors.

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Asic data released on Thursday shows that about a third of investors in binary options or CFDs have an income of less than $37,000 a year. Investors lose about $490m a year on binary options and about $1.5bn a year on CFDs, according to Asic data.

The Australian market has also more than doubled in size, from about 450,000 clients to about 1 million over the past two years as other countries, including the UK, Israel and much of the EU, have banned or restricted the products.

“Only 17% of the clients of these products are in Australia,” Asic commissioner Cathie Armour told Guardian Australia. “We are concerned about the fact that 62% of the clients are located in Asia, the biggest proportion of that in China.

“The Chinese regulators are very clear in our conversations with them that people in China are prohibited from trading in what we call contracts for difference.”

The high leverage in CFD products means that a bad move in the market can result in an investor not only losing all the money they have deposited with the provider but also end up owing it substantial amounts of money.

“We have seen a number of complaints from people who didn’t realise the funding costs and found themselves facing significant debts,” Armour said.

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It is the second time Asic has said it wants to use its new banning powers since they were introduced in April – in July it said it wanted to ban payday lending products that can result in charges of up to 990% of the amount loaned. Under the new laws, Asic is required to consult with industry before banning or restricting products.

Armour said CFDs could be a good investment for some people, and downplayed the idea companies offering them might be driven out of business.

“We think they can have a good and effective business if they operate under the adjustments we’re proposing here,” she said. “Happy customers … help contribute to a really sustainable business.”

The consultation closes on 1 October.

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