Global regulators outline concerns for retail investors

By Jon Bragg

March 24 2022
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Social media, gamification and crypto-assets are among the key concerns for regulators worldwide.

The International Organisation of Securities Commissions (IOSCO) has released a new consultation paper on conduct issues in the “rapidly evolving” retail trading landscape.

IOSCO’s Retail Market Conduct Task Force, co-chaired by the Australian Securities and Investments Commission (ASIC) and the Central Bank of Ireland, has identified a range of concerns that have emerged alongside the post-pandemic surge in retail trading.

Among the key trends examined in the report are the influence of social media on investor behaviour, the rise of self-directed trading and the increasing gamification of retail investing.

“This is a worldwide phenomenon, and likely to be an ongoing challenge for regulators and the broader investment community, especially where the harm is digitally enabled,” said ASIC commissioner Sean Hughes.

“Like ASIC, our counterparts around the world are observing common types of harmful behaviour include mis-selling, mis-labelling and misleading disclosure – all of which have the potential to undermine confidence and stability.”

The report noted that social media and other online platforms were increasingly being used to promote scams, and IOSCO members held a negative perception on social media and its impact on retail investor behaviour and decision making.

Members also raised concerns about the suitability of crypto-assets and platforms for retail investors and the potential for crypto-related fraud and scams.

“In an environment where a vast amount of information comes from social media and investors are in search of yield, retail investors may increasingly turn to higher-risk products, sometimes with high degrees of leverage and without financial advice,” the report said.

“Lack of financial education and lack of regulatory oversight in certain spot markets, such as crypto-assets, may further exacerbate the potential risks. Taken all together, these risks may create an environment where retail investors can incur losses.”

Frauds and scams, mis-selling, volatility and the increasing misuse of social media were the top retail risks identified by IOSCO members.

Furthermore, margin trading or high-risk/leveraged products, momentum investing and investing in bubbles were the main retail trading patterns that could result in or magnify harm and risks according to members.

The report also examined the impact of recent volatility events including the initial COVID-19 outbreak in early 2020 and the rise of meme stocks such as GameStop at the start of 2021.

“IOSCO members highlighted increasing market volatility as an important potential magnifier of retail investor risk, with the risk of a “market correction” exposing retail investors to severe losses if they have overinvested, followed a short-term trend into a market, or used leverage,” the report said.

Feedback on the consultation paper is currently being sought from stakeholders including investors and regulators with submissions accepted up until 23 May.

“The Retail Market Conduct Task Force has provided a timely opportunity to compare our experiences with other regulators and understand what innovative tools are being implemented successfully,” said Mr Hughes.

“Australia’s experience indicates that a flexible and creative use of regulatory tools is important in acting quickly to disrupt misconduct. We encourage a broad range of stakeholders - including retail investors, financial consumers and market participants - to engage with the IOSCO consultation.”

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