We are only two weeks into the New Year, but industry experts are beginning to express their concerns for the ensuing twelve months. In a previous article, we discussed our take on the predominant risk and fraud concerns for 2017, but in this piece, we shall present further details from the perspective of brokers, bankers, security and FinTech professionals, and regulators. Retail forex trading is a subset of the financial services industry, which has been under attack by cyber criminals for quite some time. If fraud prevention begins with awareness, then it would behoove you to understand what these experts are facing from their point of view and how it might impact your trading experience over the next twelve months and beyond.
In Part 1 of this two-part series, we outlined the predominant risk and fraud concerns for the next twelve months as follows:
#1 – Industry revenues are contracting with uncertainty looming.
#2 – The Binary Option industry is under attack for shady business practices.
#3 – Current fraud trends will continue: Ponzi, Clones, and all manner of scams.
#4 – Cyber criminals will gain more momentum in all markets.
#5 – Regulatory broadsides will reshape industry dynamics.
#6 – Moves to convert forex to regulated exchanges will gain more support.
#7 – Industry consolidation will be commonplace.
The basic message was that 2017 would be filled with surprises. Many of the prevalent risk and fraud schemes would continue, morphing into new varieties as the year progressed, while new entrants provided additional twists and turns. “Risk never sleeps, nor does organized crime in its pursuit of your hard-earned cash. Preparedness and prevention begin with awareness. Be wary of unwarranted solicitations of any kind from any source. Continually monitor your broker’s performance and prepare to switch if things become dicey.” We can also help you find a better broker, if that is necessary.
In this sequel, industry professionals weigh in on the topic, supplying us with their unique perspectives on how the criminal element in our society plans to ruin our day. For example, your forex trading account could easily come under attack, if you are not careful. You must be skeptical of false links that could connect you with criminal servers, but your broker must also be diligent in network management and blocking hackers from access to sensitive information. One cyber-security expert “categorically stated that he had been aware of several successful attempts by hackers to access FX customer trading accounts and successfully facilitate withdrawals, something which prevailed during the course of last year.” Ouch!
Protecting customer trading accounts will be a high priority for all brokerages in 2017, but this threat is just the tip of the iceberg. Our industry is overly complex, using cutting edge technology to deliver its value proposition. Toss in a hefty bit of innovation, accompanied by competition and financial pressure, and you have a perfect backdrop for organized crime to enter stage left. Crooks also invest heavily in technology and continually search for weaknesses in firewalls and operating systems. When change and uncertainty define the marketplace, crooks have greater latitude for plying their trades.
In Part 1, we began a top-down review of the fundamental drivers that will shape risk and fraud profiles for the foreseeable future. In this sequel, we will now discuss the next level down priorities that major industry participants have set for 2017. In order, the current perspectives of security professionals, financial technology providers, regulators, bankers, and brokers will be considered. Each discipline must deal with impending fraud risk in its own manner to ensure that your trading experience is safe and secure.
How do security professionals view 2017?
We have detailed on this website the sudden rise in cyber-related crime that has taken place in the past few years. Online fraud is over 60% of reported fraud in the UK, where London is the reputed capital of the foreign exchange industry. According to one cyber-security expert, “From mobile threats and malware, to the organizations on the target lists of e-commerce fraud – a myriad of threats exist across the cyber landscape and the commoditization of cybercrime is making it easier and cheaper to launch attacks on a global scale.”
Mobile technologies will be under constant assault. “Mobile is literally eating the world. It has become the dominant channel for instant communication and the expressway for banking and commerce worldwide. As organizations use mobile to transform the way they interact with customers, cyber-criminals have also taken note.” The latest estimate is that over 60% of confirmed fraud transactions originated from a mobile device. Mobile transactions are expected to surpass web-based ones in 2017. Look for biometric authentication solutions (i.e., fingerprint, voice, and retina scans) and risk-based transaction monitoring to proliferate. Payment scams and “phishing”/ransomware schemes round out the major concerns.
What priorities have FinTech providers set for the industry?
Financial technology (FinTech) providers are responsible for the backbone of our industry. These professionals develop, enhance, and maintain our telecommunication’s networks, data management and security software, Internet access, and a host of infrastructure issues far too complex to discuss here. A recent survey, prepared by a leading IT consulting firm, Synechron Inc., canvassed over 200 senior-level, global financial services business and IT decision-makers across the U.S., the U.K., and Europe. It found that “38% of respondents placed Regulation as their top priority for 2017, followed by Data Management (14.4%), Systems Integration (10.6%), Artificial Intelligence (AI) (9.7%) and IT Business Transformation (8.3%).
The researchers concluded that, “While digital innovation is at the heart of our business, financial services firms need immediate solutions to the problems they are facing today. Regulation, cost-pressure and out-dated technology systems and operations are part of almost every client conversation.” Regulators have been overly aggressive across the globe, following the major banking forex rate-fixing scandal uncovered in 2015. The FCA and CySEC announced plans in December to radically reform current practices, which will require inordinate changes in how legacy system software operates.
Innovation in the form of Blockchain technology and Artificial Intelligence will also proceed at disparate levels within forex brokerage backrooms, but you may witness a greater usage of Chat-bots for support, customer sign up, and KYC/AML compliance. While data management efforts attempt to block cyber crooks, system integration experts will optimize “liquidity risk management, credit risk management, counterparty-risk and collateral management, whereby near-shoring, smart-shoring and off-shoring can be employed along with an agile development methodology.” More change is a certainty in next year’s uncertain world.
What is on tap from the regulatory establishment for 2017?
The FCA and CySEC, along with several other EU national regulators, went on the record in 2016 that 2017 was going to be a pivotal year in the retail forex trading industry. Each took aim at binary options, CFDs, spot forex, and especially any unauthorized cross-border solicitations of their respective citizen bases. Leverage usage, bonus strategies, and transparency are to be the major battlegrounds. If the global timeline follows what has already transpired in the United States and a few other jurisdictions, then look for tests of capital adequacy to follow.
All regulators have stepped up their game, as far as putting out press releases to warn consumers of potential fraud pitfalls. The Alberta Securities Commission (ASC), one of ten provincial Canadian regulatory watchdogs, has pinpointed the following five areas as hazards to be avoided: 1) Unregistered sources; 2) Binary options scams; 3) Offshore investments; 4) Deceptive online advertising; and 5) Being lured by “the next big thing”. We expect many more such warnings to appear over the forthcoming weeks.
What new innovations from the banking sector are potential traps?
Bankers tend to be the largest service providers in our industry, only because they do so many more things other than offer just retail forex trading modules. For that same reason, their forex departments are usually limited in how much innovation they can absorb. The easy way out of this box is step up merger and acquisition activity. From a banking perspective, 2016 was a light year for M&A, but executives contend that 2017 will be quite the opposite. Keep tabs with forex headlines to see if your broker is a target.
Apart from M&A, the one way that banks impact every broker and trader is through the necessary deposit/withdrawal mechanism. Cross-border payment service providers have witnessed a re-birth in recent years, adding to both the complexity and convenience of the process. Global banks are now embroiled in a new process to introduce faster payment solutions. Many banks, however, are neither ready, nor prepared to embrace them. “Today, online money transfer and bill pay services account for approximately 1 in 5 e-commerce fraud transactions.” You might be better served to avoid the latest and greatest way to quickly pay and stick with proven payment alternatives.
What is the forecast from a CEO of a leading forex brokerage?
LeapRate recently interviewed Graeme Watkins, the CEO of Valutrades, an FCA regulated retail forex and CFDs broker, based in the City of London. Here are a few of his insights:
- Two continuing issues for brokers will be increasing costs for both lead generation and regulatory compliance;
- Recent pronouncements by the FCA will be an opportunity in the long run, but his firm will lobby for “fair and reasonable rather than excessive regulation”;
- “Volume is not key anymore and maintaining a strong balance sheet, reducing high frequency and high leveraged clients are seen as positive business steps;”
- Focus on a high level to “include deep liquidity with transparent execution, clear and prompt client engagement through our website, client portal and social media, and absolute security of funds with immediate access”;
- Lastly, another “reactive” year is expected, due to regulators, Brexit discussions, Trump-onomics, and, of course, the unknown unknowns.
Security professionals have always counseled us that fraud can never be completely eliminated. The best you can hope for is to maintain it at a low and acceptable level, but every participating component in the forex industry must work in tandem, if this goal is to be achieved. Crooks are always probing for the weak links in the chain, so to speak. Is your broker focused on the latest fraud prevention techniques? Are you aware of how easily your personal identity information can be compromised or how quickly your account balances could be depleted?
2017 will be a year marked by change and uncertainty, but it will also be a year that includes many surprises, both good and bad. Let’s try to keep the latter to a minimum. Stay vigilant, don’t be a victim, and remember that to be forewarned is to be forearmed.