Forex Regulation in Australia
The regulatory environment in Australia is market friendly which is why more and more Forex brokers are exploring it as an option. The Australian financial market continues to grow and evolve which further adds to the attractiveness of operating out of Australia.
Another great competitive advantage lies in ASIC permitting Forex brokers to utilize a maximum leverage which remains at 1:500. Many other regulators have cracked down on leverage in an ill-advised attempt to tackle investor losses; leverage is often cited as the main reason of retail trader’s losses, while the absence of risk management is to blame. Fortunately, ASIC has not subscribed to the reduction in leverage which has created an edge many traders as well as investors demand. The maximum leverage in Australia continues to attract clients from all over Asia to brokers domiciled in Australia. Despite some criticism, ASIC and APRA have created a high-quality, competitive regulatory environment which allows Forex brokers to expand their reach on a global level.
As the Forex market continues to expand, Australia has quietly grown into a hot spot for Forex brokers. While the Australian financial market is smaller than several of its global counterparts due to the country’s distance from other regions and low population, it makes up by implementing technology faster than other markets. Australia’s economy is also heavily dependent on that of China and, the Australian Dollar represents the number one Chinese Yuan proxy currency; this combination has created a market friendly atmosphere and more brokers, firms and advisors are taking advantage of it.
The regulatory environment of a Forex broker is very important for traders to consider as it will have a direct impact on the trading conditions offered. It will influence what types of assets are offered, the spread and commissions charged, the maximum leverage offered, and the protection granted. Forex traders should therefore ensure that they manage their portfolios with a Forex broker who is regulated and domiciled in a jurisdiction which allows for maximum growth potential and a competitive edge.
The emergence of blockchain technology was quickly embraced by the Australian financial market, while most brokers in other regions have been reluctant to venture into this space. Australia’s main stock market, the Australian Securities Exchange or ASX, became the first stock exchange which announced that it will build an infrastructure around blockchain technology in order to modernize operations, reduce costs, improve security as well as scalability and manage a more efficient operation of its equity market. The ASX is regulated by the Australian Securities and Investments Commission (ASIC), the same regulator tasked with oversight of the Forex market.
ASIC is one of the two main regulators in Australia, the other being the Australian Prudential Regulation Authority (APRA). ASIC was formed on July 1, 1998 and is considered a rather young regulator; but as it has shown in the case with blockchain technology and the ASX, it has also established itself as more of a leader in new regulation than a follower which gives the Australian financial market a competitive advantage. ASIC was preceded by the Australian Securities Commission (ASC) which was established on January 1, 1991 but was dissolved after the Wallis Inquiry which led to the formation of ASIC.
A History of Australian Forex Regulation
Despite its relatively short existence, ASIC has grown rapidly since it was given more responsibilities as a regulator. Its predecessor, the ASC, was only tasked with regulation and unification of the Australian corporate sector. ASC itself was a replacement of the National Companies and Securities Commission as well as the Corporate Affairs Offices of the States and Territories. In 1998, as ASIC replaced ASC, its reach extended to consumer protection in superannuation, insurance and deposit taking. In 2002, ASIC started to regulate the credit market, in 2009 it was tasked with regulation of the ASX and in 2011 with that of the Chi-X exchange.
While ASIC did rise rapidly and was entrusted with regulation and oversight of Australia’s financial market, it did make several missteps along the road. In 2012 it asked to use data which were collected by foreign intelligence agencies, in 2015/2016 it faced a class action lawsuit in regards to its failure to identify the risks which led to the collapse of Storm Financial, and consumers as well as public officials have raised questions of ASIC is properly equipped to protect consumers from large financial institutions. In 2016 ASIC started an investigation into the four largest banks and the interest-rate rigging scandal; most of the recent criticism paints ASIC as an ineffective and inactive regulator. Public outcry over scandals in the banking sector have led to a debate of a Royal Commission is required in the banking as well as financial sector of Australia, this may lead to future changes in regulation.
The Wallis Inquiry also gave birth to the second major regulator, the Australian Prudential Regulation Authority (APRA). APRA is tasked with regulating banks, credit unions, insurance companies and most firms active in the superannuation (company pension) industry sector. It was formed on the same day as ASIC, July 1, 1998, and overtook several regulatory functions which were previously held by the Reserve Bank of Australia (RBA). It also replaced the Insurance and Superannuation Commission (ISC) which was created on November 23, 1987. APRA has been very active and rose to prominence in 2001 during the collapse of HIH insurance.
APRA further increased its experience as a regulator during its investigation of the National Australia Bank Forex scandal in 2004, which uncovered unauthorized spot trades which resulted in losses of A$360 million and a cover-up attempt; ASIC charged two traders who were sentenced to prison terms. In July 2015, APRA replaced the Private Health Insurance Administration Council and after it was criticized in 2018 for limiting competition in the Australian banking sector, it created the Restricted Authorised Deposit-Taking Institution (RADI) licensing framework. The goal of RADI is to increase competition and encourage new entrants to the baking system.
Technological Advancements ‘Down Under’
Despite the heavy dose of criticism, which is part of every regulator’s due across the global financial system, ASIC and APRA create a regulatory duo which is more than capable of policing the Australian financial market, including the Forex market. ASIC appears to have learned from its mistakes of the past and is now leading regulators into the next evolutionary phase of global finance, as evident with its involvement as a regulator of the ASX blockchain project. It is also worth pointing out that past mistakes were centered around large and complex financial institutions, while Forex brokers certainly fall outside of this category.
Another example of technological improvements is the creation of the New Payments Platform (NPP), an open access infrastructure in order to enable Australian households, companies and government agencies to conduct simple transactions in near real-time and 24/7.
Since technology is playing an ever-increasing role in global finance, with an estimated 80% of all trades placed through automated solutions, Forex brokers who seek to be at the forefront of this financial technology evolution have found a great partner with the Australian regulators. This explains why some of the most technologically advanced Forex brokers already operate out of Australia and why the country is attracting more inflow across the globe. Its close relationship with China and other Asian markets give Australia another competitive edge.
ASIC is not only active in regulating the Australian financial market, but also in educating traders and investors; one example is the MoneySmart program. Overall, ASIC is doing a solid job in ensuring the safety of the financial system, Forex brokers regulated by ASIC must keep a minimum of A$1 million in cash at a Tier 1 bank and hold clients’ capital in segregated accounts. Forex brokers are also required to file annual compliance reports, identify and monitor customers using a risk-based approach, and report suspicious activity to the regulator.
Completing the regulatory environment of Australia is the Australian Competition and Consumer Commission (ACCC) and the Australian Payments Network Limited (AusPayNet). ACCC is tasked with the protection of consumer rights, business rights and obligations, industry regulation and price monitoring as well as prevent illegal or anti-competitive behaviour. ACCC was established in 1995 and is an independent authority of the Australian Government. AusPayNet was founded on February 18th, 1992, and ensures the payments industry’s safety, reliability, equity, convenience and efficiency; it was formerly known as the Australian Payments Clearing Association (APCA).