Fixed Interest Hybrid Security Investments Need to be Reviewed

22 August 2013

This article was written by Trent Stewart, SMSF adviser.

The corporate regulator has raised concerns about the way hybrid securities are being sold to investors, a majority of which are SMSFs.

Following a 12 month review of the sector, the Australian Securities and Investments Commission (ASIC) released Report 365 Hybrid Securities this week.

With investors chasing yields in recent years, $18 billion in ASX-listed hybrid securities were issued between November 2011 and June 2013, according to the report.

The regulator indicated that research by Investment Trends conducted earlier this year found two thirds of direct investors are SMSFs, and that financial advisers were only involved in 40% of investors’ investments in hybrids.

Because a majority of investors are not receiving advice about hybrids, the prospectus should include a “short, easy-to-read explanation of the key features and risks of the security”, the report said.

In addition, the extensive use of pro forma emails and stand-alone offer summaries “at all levels of the sales process” requires investors to have access to detailed information about the features and risks of hybrid securities, ASIC said.

Finally, because most hybrid investors are SMSFs seeking an income stream, “it is critical that investors understand that…hybrid securities are not ‘government guaranteed’, involve the risk of capital loss, and may have their interest payments deferred for long periods”, the report said. ASIC does not intend to take any further regulatory action in connection with the content of hybrid offer summaries or the way in which pro forma emails and stand-alone summaries are used, but the regulator will “continue to monitor the selling methods used for offers of hybrid securities”.

“We may undertake further targeted reviews to ensure standards are maintained. We will also investigate any reports of brokers promoting hybrid securities as fixed income products in a misleading fashion,” said the report.

The regulator also intends to determine whether tools can be developed so investors can “check their understanding of hybrid securities before investing in them”, it said.

ASIC warned that it may also consider “further naming conventions in relation to hybrid securities” to ensure hybrid instruments are not named in a way that will confuse investors.

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