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Tuesday 20 August 2013

13-220MR ASIC continues crackdown on hybrids

Following recent ASIC action, we have seen an improvement in the disclosure of the risks of hybrids. But there is still work to be done to make sure these complex financial products are not mis-sold to investors.

Key points:

  • ASIC will now focus on possible misleading conduct in the sale of hybrids. This includes inappropriate labeling of hybrids and unwarranted comparison of hybrids to different, less risky products e.g. covered bonds or senior debt

  • Spruiking the potential higher returns of hybrids and the brand name or reputation of the issuer without balancing that with the risks of the product can also cause investors to be misled

  • Investor education about these products is critical. ASIC will explore whether new strategies can be developed to help investors check their understanding of hybrids before investing in them

ASIC today released Report 365 Hybrid securities (REP 365) which discusses recent offers of hybrids in Australia.

There has been more than $18 billion of hybrids issued by banks and corporates since November 2011. There were approximately 75,000 investors in hybrid securities last year, two thirds of whom were self-managed superannuation funds (source: Investment Trends).

ASIC has reviewed the selling methods and sales processes of issuers and brokers. REP 365 discusses the findings of the review in detail.

‘Investor education is critical while those distributing these products need also to do the right thing,’ ASIC Commissioner John Price said.

‘We have responded to the increased issuance and popularity of hybrids by working with issuers and their advisers, as gatekeepers, to help improve prospectus disclosure and ensure selling messages are not misleading.

‘But there is more work to be done and we will investigate any reports of misconduct (e.g., misleading promotion or inappropriate comparisons with other products), crackdown on misleading ads, and consider what names or labels hybrid products are given to ensure they do not confuse investors.’

Download:

REP 365

Background

Hybrid securities often promise ‘high yields’ and are issued by well-known companies with trusted brands, but investors need to very carefully consider the features and risks before investing.

The terms and conditions of each hybrid issue vary and in some cases they include features that mean they rank closer to equity than debt.

It may be misleading to:

  • sell or treat hybrids as simple debt products if they have significant equity-like features

  • compare the performance of hybrids to products that are less risky or indexes that contain less risky products (e.g. Government bonds, corporate bonds and fixed income indexes)

  • spruik the returns from hybrids without giving due prominence to their risks.

ASIC will carefully review how issuers, brokers, advisers and asset managers treat or describe hybrids where we have concerns about potential misleading conduct.

ASIC encourages investors to very carefully assess the terms of each hybrid offer. Higher promised returns reflect higher risks.

Further investor guidance is available on ASIC’s MoneySmart website.

ASIC has also previously warned investors about risks and complexities of hybrids (refer: 11-270MR and 12-207MR).

Last updated: 20/08/2013 12:00