Imagine you could go to your local TAB or a sports betting agency to make a $100 bet and were told you have to pony up 50 cents and pay the rest only if you lose.
Well, that same principle applies in the world of high finance, with hundreds of thousands of Australians effectively punting their hard-earned cash “on the nod” each day with a host of brokers who trade financial products called “contracts for difference” (CFDs).
And it’s not only shares on which punters can speculate. Almost anything that has a futures market has a matching CFD, including multiple denominations of currency, gold, commodities and a host of major stock market indices from around the world.
The Australian Securities and Investments Commission this week proposed to use its new product intervention powers to curtail the explosive growth of trading in those products, claiming they were causing “significant detriment” to retail investors, most of whom lose money.
A regulatory review found up to 72 per cent of people lost money dabbling in CFDs, including those most unlikely to be able to afford it with annual incomes between $37,000 and $80,000.
At the heart of ASIC’s concerns is the leveraging – or level of credit – available to retail CFD traders that could result in debts to their brokers spiralling out of control.
The regulator has proposed that CFD brokers slash their leveraging levels from up to 200:1 to no more 20:1 for all global currencies and gold – and 15:1 for stocks.
Currently, there are no limits on the amount of leverage for CFD investors, but brokers let them usually bet up to 200 times as much money as they actually deposit into their trading accounts, making punters potentially liable for massively higher losses than their original investment.
Other changes mooted include more transparency of CFD pricing, execution, costs and risks, a standardised approach to the automatic close-out of client positions, protection against negative balances and a ban on all inducements to sign up for trading.
ASIC Commissioner John Price told The Sydney Morning Herald and The Age on Thursday the move was all about consumer protection.
WRITTEN BY: Stephen Miles
Stephen is Investment Editor at The Age and Sydney Morning Herald. He writes about personal finance issues and markets as well as editing Money.