ASIC may ask investors to prove skills
The corporate regulator has admitted that Australia's disclosure regime has "inherent weaknesses" that failed to prevent investors losing "a lot of money" on complex financial products.
It is considering requiring investors prove they have a basic level of understanding before they can invest in such products.
Australian Securities and Investments Commission chairman Greg Medcraft said investors had "lost a lot of money" on complex instruments since 2008.
These products included derivatives such as "collateralised debt obligations" and "CDOs squared".
Such instruments have been widely criticised for the their role in the global financial crisis.
"Wholesale and retail investors were unable to understand or value the risks inherent in these products," Mr Medcraft said.
"Complex products, due to their nature, can be difficult for investors to understand. This can lead to them being mis-sold, particularly when investors are searching for yield."
Speaking at the ASIC annual forum in Sydney, Mr Medcraft said the agency was considering the best ways to regulate such products.
This included requiring investors prove they could understand how such products worked before they invested in them.
"For example, e-learning modules which explain the key features and risks of a product could be used to educate potential investors about a product," he said.
"This could overcome the inherent weaknesses in traditional disclosure methods. An online assessment model could then be used to assess the person's understanding before they invest."
ASIC has been heavily criticised in recent years for allowing complex financial instruments, such as CDOs, to be sold to unsophisticated investors.
In November, the Federal Court found in favour of 13 NSW councils in relation to the sale of complex financial instruments.
The councils were awarded more than $20 million in compensation and legal costs after the court found they were misled by the S&P ratings agency, the ABN AMRO Bank and the Local Government Financial Services about products nicknamed "Rembrandt notes" in the lead-up to the financial crisis.
The councils had invested $16 million in the products, but the investments collapsed and they lost more than 90¢ in the dollar.
The Federal Court's Justice Jayne Jagot found S&P's AAA rating of the financial products was misleading and "grotesquely complicated".