Investment risks concealed

Investors must always be on their guard because in Australia almost any kind of financial product can be sold to unsophisticated consumers.

But at least the risks and costs are spelt out to potential investors, right? Well, not exactly.

The central idea behind investor protection is that anything goes, just as long as the risks are disclosed.

But the rapid growth in the number of exotic, complex derivative products and software trading platforms is testing this disclosure-based system to its limits.

Trading platforms are being advertised on daytime radio as a way to effortless wealth, often without any references to the risks.

At worst, investors could lose all of their capital but, even if they do turn a profit, it would probably be eaten up in fees and trading costs.

The providers of these products are often overseas-based companies operating in several countries.

Before they launch a product here, they will have been advised by Australian financial services lawyers.

They know they are required to reveal all of the risks to investors in their disclosure documentation. And yet, proper disclosure among the providers of these risky products is patchy. Important information, which would doubtless frighten off potential investors, is omitted, minimised or obscured.

Don't think that the prospectuses are checked by the Australian Securities and Investments Commission (ASIC). Only a tiny fraction ever are. And what is checked is disclosure, not the products' investment merits.

If the regulator does have a concern, it will write to ask the provider to improve its disclosure. The regulator's letter will end with a vague threat that it will take "further action" if disclosure is not improved.

This soft treatment by the regulator has the potential to encourage providers intent on doing the wrong thing to play cat and mouse over disclosure.

Recently, ASIC released its review of 64 prospectuses from providers of complex products including foreign exchange, futures and commodities and managed funds with "alternative asset-class exposure, leverage or dynamic management" and capital-protected products.

As is the regulator's usual practice, the review did not name the providers but found many prospectuses had deficient disclosure and that "in some cases, the disclosure was structured in such a way that key risks were concealed".

The providers have been asked to fix up their disclosure. To show it is serious about proper compliance, the regulator should impose fines on those providers that it believes conceal risks rather than treating it as an administrative matter.

Unless the regulator shows it is serious about enforcing the law, some product providers will think that the risks to themselves of continuing to deceive investors are worth it.

The upshot for investors is that just because a prospectus, marketing material or advertising does not mention particular risks, it cannot be safely assumed those risks do not exist.