Expansion, Not Evolution
Q: Let’s start with the new digital assets law reform. One of the most significant proposed changes appears to be the shift from asking “what is the product?” to “what does the platform do?” and how it operates. This seems to be an attempt to reduce misunderstandings and eliminate regulatory grey areas. Can you elaborate on this?
I don’t agree with this. The Australian licensing regime has always focused on both ‘financial services’ and ‘financial products’. I don’t see any fundamental change here, except that there are additional services being added to account for these additional concepts.
Crypto Providers and Existing Regulations
Q: What were the most common ways in which crypto providers exploited
or stretched the existing regulatory framework? What were the key issues that
prompted ASIC to propose these new rules?
The current AFSL regime captures crypto providers where the product they are offering or dealing with can be characterised as a derivative, NCP, managed investment scheme (aka fund), debenture or other financial product under the Corporations Act. However, direct crypto did not meet any of the financial product categorisations. Therefore I don’t think it’s fair to say that crypto providers “exploited” or “stretched” the existing regime.
Many tried to get licensed by ASIC under the AFSL framework but were denied on account of not falling inside of it. ASIC was quite firm that direct crypto did not fit within the boundaries of definitions of financial products which don’t encompass the characteristics of crypto products.
Impact on CFD Brokers Offering Crypto Derivatives
Q: The proposed regulations clearly target crypto
exchanges and firms dealing with spot cryptocurrencies. But do they also apply
to CFD brokers offering cryptocurrency-based derivative products?
CFD brokers offering
cryptocurrency-based derivative products are already subject to the current
licensing regime. Some CFD brokers also
offer direct crypto products separately to their derivative offerings.
Crypto Deposits, Withdrawals, and Client Money Rules
Q: Will the new regulations affect CFD brokers that offer cryptocurrency-based deposit or withdrawal options? If so, how might this change the nature of cooperation between ASIC-regulated CFD brokers and payment providers supporting deposit and withdrawal processes?
CFD brokers are already impacted by the fact that they need to hold client money in Australian Deposit-Taking Institutions (ADI). Holdings of cryptocurrency are not recognised otherwise. Therefore any broker currently holding crypto balances for clients is required to hold the fiat equivalent at an ADI to meet their daily client money reconciliation requirements, on top of the crypto that they are holding for them. There is no current proposal to change the client money rules to encompass client money crypto balances.
Recommended Actions for CFD Brokers
Q: What precautionary actions would you recommend
for ASIC-regulated CFD brokers in response to these proposed regulatory
changes?
Many CFD brokers which hold an
AFSL should assess whether the newly introduced products are applicable to
their business and have conversations with their lawyers or consultants on the
licensing implications. While ASIC-regulated CFD brokers are familiar with
their obligations under existing laws, they need to be prepared that a wider
range of their operations could become captured.
Key
Deficiencies Identified in ASIC
Q: Returning to ASIC’s earlier announcement this
year regarding securing nearly $40 million in refunds to CFD investors, the
regulator stated that in 2025 approximately 39 issuers made changes to their
target markets, while 46 issuers improved their website content. Do we know
what specific changes were required? This could serve as a valuable case study
for brokers regulated outside Australia as well.
- ASIC's recent sector-wide review of CFD issuers focused on marketing practices, effectiveness of TMDs, client onboarding processes and questionnaires, ongoing client monitoring processes, compliance with derivative transaction reporting rules and breach reporting procedures.
- Marketing practices - ASIC focused on the websites operated by CFD issuers, with concerns mainly around there being not enough risk disclosures and presenting features of trading CFDs in a misleading or unbalanced manner. For example, CFD issuers tend to emphasise that client monies are safe because they are held in segregated client money accounts, but ASIC's view is that this is a legal obligation, not something that clients opt into for the benefit of safety and security of funds.
- TMDs - ASIC looked closely into wording of TMDs against the CFD issuers' client onboarding procedures. Many CFD issuers were requested to present an onboarding walkthrough to ASIC. ASIC was concerned that many TMDs were not effectively testing whether their CFD products were suitable for retail clients and requested specific edits to TMDs to ensure the criteria were clearly defined and able to be specifically tested during onboarding procedures.
- Onboarding - Most CFD issuers opt to use client questionnaires and knowledge tests to onboard clients. ASIC looked at the way questions and answers were phrased - whether questions were too simple or complex, whether questions properly addressed criteria in the TMD, how the questionnaire workflow flags clients who may be unsuitable for the product, how CFD issuers respond to flagged or rejected applications. The takeaway from ASIC's review in this aspect is that assessing client suitability must be a genuine and considered process, not a box-ticking exercise.
- Ongoing monitoring - ASIC noted some CFD issuers lacked ongoing monitoring processes, which meant that CFD issuers did not review whether products were suitable for clients once the client passed initial onboarding. As a high-risk high-loss industry, ASIC expected CFD issuers to monitor client trading activities on an ongoing basis to ensure that their products remain suitable for the target market, and test that their TMD still remains effective and appropriate. This includes having a list of trigger factors (for example, size of losses, deposit/withdrawal amounts), building these triggers into their systems, ensuring systems can raise alerts to appropriate persons for review and action. CFD issuers should also be reviewing their list of trigger factors regularly to ensure they remain relevant for their business.
- Derivative reporting - The new rules came into effect in October 2024. ASIC was concerned that CFD issuers were not familiar with the technicalities of the rules and reporting formats, and simply relied on reporting delegates without actively overseeing the work carried out. Many firms were required to conduct backloads of erroneous reporting and also submit associated breach reports to ASIC. This was on top of fixes to ongoing reporting submissions as well.
- Breach reporting - As a result of this review, many incidents/breaches were identified. ASIC gave opportunities to licensees to assess the breaches as to whether they constitute reportable situations. ASIC expected licensees to be able to identify breaches, assess their significance, and prepare quality breach reports.
Future Focus for ASIC-Regulated CFD Brokers
Q: Finally, looking ahead, what should ASIC-regulated CFD brokers focus on improving to better align with regulatory expectations?
ASIC clearly stated in their review that they are going to be looking at copy trading services and issuers’ processes for classifying retail and wholesale clients.
This ASIC review pointed out many deficiencies and opportunities for uplift, and the process has been fairly consultative. As always, this is not a one-off test for the sector, there will certainly be more to come (as those who have been in the industry know after years and years of questionnaires and interventions). It is expected that this industry will continue to be under strict scrutiny and enforcement action will be harsher especially if licensees remain ignorant in respect of their obligations. ASIC has reminded licensees that compliance is not a "set and forget" task - it is something that requires ongoing effort. CFD brokers should recognise that as much as the ASIC licence is highly reputable, it brings higher expectations in terms of the quality of compliance and standards that must be adhered to.
Sophie Gerber is the Founder and Director of Sophie Grace Pty Ltd and Sophie Grace Legal Pty Ltd. It is an independent Australian firm that provides legal and compliance consulting services specifically tailored to the financial services and credit industries. Operating for over a decade, the firm assists both domestic and international clients in navigating the Australian regulatory landscape by offering guidance on securing an Australian Financial Services Licence (AFSL) or an Australian Credit Licence (ACL).