ASIC Investigation Leads to Interactive Brokers Refunding $1.5 Million to Australian Customers

Following an investigation by ASIC, Interactive Brokers LLC (IB), a US-based online brokerage firm, will refund approximately $1.5 million in fees and commission payments to its retail margin lending customers.

The refunds will be made as part of an enforceable undertaking (EU) accepted by ASIC and follow an ASIC investigation which found that IB did not, during the period July 2010 to August 2013, hold an Australian financial services licence (AFS) licence which authorised the provision of margin loans.

ASIC was also concerned that IB did not comply with its responsible lending obligations when issuing margin loans by not verifying customers' financial information. Approximately 3000 retail customers took out a margin loan with IB during this period.

Under the terms of the EU, IB:

• admits that it contravened the Corporations Act 2001 by not holding an authorisation under its AFS licence that covered the provision of margin loans
• undertakes to refund approximately $1.5million in fees and commission payments received from approximately 3,022 retail customers who used IB's margin lending facilities during the period from 1 July 2010 to 19 August 2013
• will pay $100,000 to the Financial Rights Legal Centre for the purposes of consumer education concerning financial services and consumer rights in Australia, and
• has engaged independent consultant PricewaterhouseCoopers to check that the customer refunds have been calculated and paid in accordance with a methodology agreed between IB and ASIC.

PricewaterhouseCoopers will be reporting on its verification of the refund process to ASIC and IB.

Commissioner Greg Tanzer said, 'Margin loans come with unique risks and will not be suitable for all consumers. It is therefore important that they be provided by appropriately licensed or authorised companies. Providers must also comply with their responsible lending obligations when issuing margin loans.'

IB entered a voluntary undertaking with ASIC in August 2013 and agreed not to issue any new or increase any existing margin loans. IB also wound down the facilities and is not currently offering margin lending facilities to natural person clients in Australia (refer: 13-232MR ASIC surveillance prompts brokerage to stop new margin loans.

The regulation of margin lending commenced on 1 January 2010 with the introduction of the Corporations Legislation Amendment (Financial Services Modernisation) Act. The Act requires (among other things):

• issuers and advisers of margin lending facilities to be licensed by ASIC under an AFS licence
• advisers to only provide advice that is appropriate to the client's individual circumstances
• 'margin lenders must carry out reasonable inquiries about a retail client's financial situation and assess whether the proposed facility is unsuitable for the client'
• consumers to have access to external dispute resolution services, and
• clarity around responsibility for notifying clients in the case of a margin call.