Financial Regulation in the European Union to Help Prevent Forex Fraud

Chris Lee

Regulation makes up one of the most effective ways of preventing forex fraud from occurring, and a number of organizations worldwide keep a watchful eye on the retail forex market to make sure consumers are treated fairly.

Despite the lack of a global organization to oversee the forex market, the 27 member European Community — along with the nations of Iceland, Norway and Liechtenstein — have developed an instrument for a harmonized regulatory regime for financial and investment services within its jurisdiction.

The Markets in Financial Instruments Directive or MiFID

The Markets in Financial Instruments Directive, or the MiFID as it is commonly known, was instituted primarily with the purpose of integrating the European Union’s financial markets and to increase the volume of cross border investments.

The MiFID also forms the basis for the European Commission’s Financial Services Action Plan. This plan consists of 42 measures which make up a four tiered approach to market regulation that are part of the “Lamfalussy Directives”, which are named after the Chairman of the Committee of Wise Men, Baron Alexandre Lamfalussy.

In addition to the MiFID, three other “Lamfalussy Directives” exist. Specifically, these are the Transparency Directive, the Market Abuse Directive and the Prospectus Directive.

The MiFID Passport

The introduction of the MiFID in 2007 replaced the previous market regulatory legislation called the Investment Services Directive or ISD. This former set of rules introduced the concept of “market harmonization and mutual recognition”, which also emphasized home state supervision.

This means that the regulatory body for the home state where the financial services company is based is responsible for the regulation of the financial services offered by those financial services companies, which currently includes regulating the forex market.

Once a financial firm is authorized to operate in a member nation, the firm can accept clients from any of the other European Union states through what is known as a MiFID “passport”.

A MiFID passport gives investors and retail forex traders from countries in the European Union a higher level of protection than without the directive.

In addition, the MiFID obligates member firms to have both pre and post trade transparency in their forex brokerage services provided to retail clients.

Regulatory Agencies in the European Union

The following are the primary regulating organizations for financial services providers that may include retail forex brokers operating in the following countries of the European Union:

  • Austria – Financial Market Authority (FMA)
  • Belgium – Banking, Finance and Insurance Commission (CBFA)
  • Bulgaria – Financial Supervision Commission of Bulgaria (FSC Bulgaria)
  • Cyprus – Cyprus Securities and Exchange Commission CySEC
  • Czech Republic – Czech National Bank
  • Denmark – Danish Financial Supervisory Authority (Danish FSA)
  • Estonia – Finantsinspektsioon
  • France – Autorite des Marches Financiers (AMF)
  • Germany – Federal Financial Supervisory Authority (BaFin)
  • Greece – Capital Market Commission
  • Hungary – Hungarian Financial Supervisory Authority
  • Ireland – Irish Financial Services Regulatory Authority
  • Italy – Commissione Nazionale per le Società e la Borsa (CONSOB)
  • Latvia – Financial and Capital Market Commission
  • Lithuania – Securities Commission of the Republic of Lithuania
  • Luxembourg – Commission de Surveillance du Secteur Financier (CSSF)
  • Malta – Malta Financial Services Authority (MFSA)
  • Netherlands – Authority for the Financial Markets (AFM)
  • Poland – Polish Financial Supervision Authority (KNF)
  • Portugal – Portuguese Securities Market Commission (CMVM)
  • Romania – Romanian National Securities Commission
  • Slovenia – Securities Market Agency (ATVP)
  • Spain – Comisión Nacional del Mercado de Valores (CNMV)
  • Sweden – Financial Supervisory Authority of Sweden
  • United Kingdom – Financial Services Authority (FSA)

Three other countries that are currently outside the European Union have also adopted the MiFID. They and their financial regulatory organizations are:

  • Iceland – Icelandic Financial Supervisory Authority
  • Liechtenstein – Financial Market Authority (Liechtenstein) (FMA)
  • Norway – Financial Supervisory Authority of Norway

Financial firms regulated by any of these organizations can now benefit from the MiFID’s passport program when dealing with residents of other countries.

Basically, the MiFID provides the forex market with a standardized home based regulating mechanism that services the entire European Union.

To some extent, this helps provide European based forex traders with a measure of recourse in the event that a problem should arise when dealing with their retail forex broker.

Chris Lee

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