New Swiss Forex Fraud Fighting Rules Bring Effective Broker Regulation

Chris Lee

Swiss forex regulation was a popular topic of derision in some forex trading circles, until recently that is. The reason for this was that the Swiss regulatory agencies — of which there are many — did not seem to regulate the retail forex market in any significant way.

Nevertheless, because of new stricter rules introduced in 2009, many Swiss based forex brokers have had to pack up and leave for other locations where they can continue operating in a relatively unregulated environment with little or no official supervision.

Many forex related companies formerly took advantage of Switzerland’s reputation as a safe haven and set up forex brokerage houses which were essentially “bucket shops” or brokerages that took customer orders without actually executing them in the forex market.

Fraudulent Swiss Brokers

Last year, Swiss based forex broker Crown Forex declared bankruptcy, after having lost roughly $79 million of its customers’ money in the process.

Up until late 2008, Crown Forex had been a top choice among online forex brokers and had accumulated literally thousands of retail forex trading customers.

Nevertheless, the company was only regulated by the Association Romande des Intermédiaires Financiers or ARIF. This is one of many private regulatory agencies in Switzerland specializing in the prevention of money laundering.

Furthermore, according to legal documents filed by the SEC against Crown Forex, the brokerage was effectively engaged in a Ponzi scheme which ran for several years while the company was being regulated by a Swiss regulatory agency.

This illustrates just how ineffective the previous forex broker regulation in Switzerland has proven to be.

Since the Crown Forex fraud, other Swiss based forex brokers have also run into problems. Nevertheless, with the new rules in place, most questionable forex brokers based in Switzerland have packed up and moved.

Some of them have headed to Cyprus where they can continue to operate as forex broker without such strict regulation, although they do have to submit to some regulation since they are still based in the European Union.

New Swiss Rules

According to the Swiss Bank Directive 3a, companies holding customer funds in trading accounts must now get a banking license issued to them from the Swiss Financial Market Supervisory Authority or FINMA, before being able to execute orders for them.

Getting a banking license in Switzerland, — where the banking industry is the most carefully regulated in the world — may not be a small feat, usually requiring a large capital base to even be considered.

Nevertheless, only two forex brokers have thus far qualified and received their banking licenses from the FINMA since the rules went into effect, These are Geneva based Dukascopy and Neuchatel based MIG Bank. Another Swiss based broker, ACM is currently on the waiting list for a Swiss banking license.

According to FINMA spokesman Alain Bichsel, “The forex business was in too much of a grey area, there were always client complaints, and the risk for the client was higher because these businesses were unlicensed.”

The customer complaints included such serious problems as forex brokers cancelling trades without authorization, failure to return client assets on request and changing the price dealt at after executing the trade.

In addition, many of the forex brokers would act as the counterparty on customer trades, making money only if the client lost money. A successful trading customer could therefore seriously damage their business, perhaps to the point of bankruptcy.

Bischel went on to comment that, “The measures have given more transparency to the market and greatly reduced the chance of market failures. The security of clients is hugely improved, and that was the target of the regulations.”

An End to Swiss Forex Fraud?

Because of Switzerland’s reputation for being a neutral country with a strong banking industry, many people tend to assume that a forex broker based in Switzerland would have to be legitimate.

Nevertheless, customers of Crown Forex — and other Swiss firms which went out of business taking their client’s money with them — may differ on the matter.

Due to the new Swiss regulations, putting your money in a Swiss based forex brokerage account does not have to turn into a nightmare, as was experienced by customers of Crown Forex and other now-defunct Swiss based forex brokers.

Overall, while additional regulation may not put an end to fraudulent practices in the Swiss based forex market, it will very likely make Swiss brokers less able to rip people off.

It will also result in better capitalized forex brokers in Switzerland since they now need to qualify for a Swiss banking license.

Basically, the new rules mean that the Swiss FINMA will now join the U.S. CFTC and NFA, the U.K. FSA and the Australian ASIC in being a far more effective force in the regulation of the forex market in Switzerland.

Chris Lee

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