Should I stay or should I go, a popular refrain from a 1982 song by the English punk rock band “The Clash”, is currently being muttered in many backrooms of quite a few forex brokers in both the UK, as well as the EU. When the FCA and CySEC spoiled the holiday celebrations in December with their constraining plans for brokers under their respective jurisdictions, it sent shockwaves through many a boardroom. Proposed constraints on leverage and incentive bonuses would strike at the heart of the revenue equation for spot forex, binary options, and CFDs, forcing brokers to decide if they wanted to stay in their present jurisdictions or go to a more accommodating region.
The list of accommodating regions, however, is getting smaller by day, as regulators in other countries are now jumping upon the reform train in earnest. No one wants to be left at the station and appear that they are not looking out for the well being of their local constituents. In the past few weeks, Malta, Spain, Australia, and New Zealand have issued circulars that contain proposed rule changes that mimic the goings on in the UK and Cyprus. CySEC, like a bear coming out of hibernation, has continued to blitz its brokerage community with a host of new regulations, each designed to tighten down the screws one more turn. What is a broker to do under these draconian circumstances?
What has CySEC done to make to make the current environment more restrictive?
When compared to the FCA’s very deliberate approach in the UK, the officials at CySEC appear to be a flurry of tempests in a Cypriot teapot. We recently reported that, “They have issued two additional circulars. The first one in early February was one “relating to sales and marketing practices, outsourcing of third party services, the provision of investment advice and the competence / compliance of sales staff.” The second circular soon followed and laid out specific guidelines of behavior for the binary options industry.”
Why has CySEC gone into overdrive on the reform front? The financial crisis in Cyprus in 2013 stirred the pot back then, requiring a number of changes to eradicate its reputation for being the most lenient and lax of the European regulatory crew. Fast forward to today, and new concerns were raised during 2016 for its serious lack of oversight in the binary options industry, which may have contributed to untold millions in losses for unsuspecting consumers. The word on the street was that the European Securities and Markets Authority (ESMA), an independent EU Authority, was putting pressure on CySEC officials to clean up their act regarding serious shortcomings.
One recent directive from ESMA left little doubt about the target of its contempt: “The European Securities and Markets Authority (ESMA) recently issued a warning about the sale of contracts for differences (CFDs), binary options and other speculative products to retail investors who are unaware of the risks associated with these products, and also highlights the regulatory action taken in relation to several Cyprus-based investment firms.” From that point on, CySEC officials were on notice.
Whatever the cause, the CySEC circulars have been flying off the printing presses since February, including the latest attack on bonus schemes, referral payments, trading competitions, and cash rebates. Its 2016 missives were general in nature in this area and lacked the specificity needed for exact interpretation: Brokers “must avoid the practice of offering bonuses that are designed to incentivise retail clients to trade in complex speculative products such as CFDs, binary options and rolling spot forex.”
Due to the ambiguity at hand, many brokers were beginning to think that they might still have some wiggle room, if you will, in how they attracted new and retained old clients within their customer base. Bonuses and competitions have become commonplace in every region of the world as a competitive marketing tool. The sneering tone of this circular, however, suggested that if a broker “wishes to reward its clients, it can offer to them for example lower spreads instead of a return of an amount.”
The appendix to the circular went on to list ten specific examples of what can no longer be offered. It also noted that the list was by no means an exhaustive compilation, thereby suggesting that newer forms of creative incentives may not comply with the law by design as determined at the discretion of the regulator. The ten items detailed were: 1) Welcome / Deposit Bonus / Re-deposit bonus; 2) Volume Bonus; 3) Refer a friend; 4) Verification / Webinars; 5) Gifts / Gadgets; 6) Tournaments / Competitions; 7) Trial / Protected / Risk-free Accounts; 8) Cash Rebates; 9) Interest on Deposits; and 10) Similar bonuses schemes as the above.
Cyprus has been a success story of how a small island community can become a financial center within a much larger market. As one analyst put it: “The island is an absolutely first class place to do business, is home to fantastically knowledgeable professionals and has the absolutely right formula of institutional and technology firms in place.” It is home to over 180 retail forex firms, including a myriad list of support elements that include ancillary service providers, platform developers, liquidity management companies, charting and analytic providers, professional consulting firms, and regulatory technology and reporting entities.
Interested observers do not want to see the island fail, due to the current tide of low-integrity firms that have washed upon its shore. These critics suggest that the forex industry on the island must elevate itself to the next level by offering products and services to a “higher caliber of customer.” In order to accommodate the higher end of the investment community, more compliance, not less, is the order of the day.
According to an ESMA spokesman, “ESMA and national regulators are committed to working together to ensure investors receive proper protection across the EU. Unless firms are prepared to move themselves on, and adapt different practices, emulate the more sophisticated trading environments of London and New York, there will be limited upward mobility.” In other words, these words are a veiled threat that, if firms do not step up, ESMA will force the closure of many smaller brokers on the island.
What other regulators are making demonstrative moves in the forex space?
Regulators in both Europe and Asia are taking positive reform steps in their respective jurisdictions. The first of note is the Malta Financial Services Authority (MFSA).
The Republic of Malta, or Malta for short, is another island community in the Mediterranean that has a similar success story to that of Cyprus in some regards. The island is primarily a tourist destination, south of Italy and north of Tunisia, but it has attracted a handful of forex and CFD brokers, but not nearly on the same scale as Cyprus. In anticipation or a hoard of relocations from the UK and Cyprus after their more stringent rules take effect, the MFSA has finalized its own version of forex reform.
The MFSA may appear to be a follower, but it actually published its proposed changes for forex and CFD brokers back in October of 2016. It had focused, as did the FCA and the CySEC, on leverage, but it also established a new capital floor for all licensees, a new requirement of €730,000. Its published document also disclosed feedback and the agency’s rationale for each rule change, which go into effect in six months (3 October 2017). The finalized maximum leverage limits fixed on three options as follows:
1) For retail clients – 1:50;
2) For retail clients electing to be treated as professional clients in terms of MIFID – 1:100; and
3) For all other clients – no leverage limits are being imposed.
The MFSA rounded out its reform package by requiring that all forex and CFD brokers “submit to the Authority, on an annual basis an audit of the IT systems used. Further details on this requirement will be issued by the MFSA in due course.”
The MFSA was not the only regulator that became more strident on the regulatory front. Spain, Australia, and New Zealand were also in the news. Here is a brief summary of actions taken by each agency:
- Spain: The CNMV (Comisión Nacional del Mercado de Valores) took a more cautious first-step approach dictating a more active disclosure process related to marketing of forex, CFD and binary option products. The agency stopped short of placing new limits on leverage, but the CNMV noted that other countries had already imposed a number of measures, which it was considering and had not ruled out;
- Australia: ASIC has already been vocal in the press that tougher rule changes would be forthcoming in 2017 for licensed retail forex brokers. It, like the CNVM, however, did not attack leverage limits, but only stipulated that “all client money to now be fully segregated and held in trust.”
- New Zealand: Asia may still be fertile ground for foreign brokers to till, such that rulings are often a few years behind more developed markets as Europe and the United States. As an initial step, the local regulator, the Financial Markets Authority (FMA), “plans to require all brokers offering spot forex, CFD and binary options trading to obtain a derivatives license in the country.” All brokers, both foreign and domestic, must comply by December 1.
How has the brokerage community responded to these rule changes?
Several forex brokers in Cyprus have been actively moving their accounts to offshore companies in an attempt to escape the new regulations. As a result of these backroom machinations, according to Leaprate, CySEC has suspended the licenses of four firms:
- Leadtrade Ltd, which operates the TopOption, Prestige Option, Excellence Option and Platinium Option binary options brokerage brands,
- TTCM Traders Trust Capital Markets Ltd, which operates TradersTrust,
- Gametech (Cyprus) Ltd, which operates binary options broker ProOptions, and
- Dragon Options Ltd, which operates the eponymous binary brand Dragon Options.
In a related action in the UK, IKON Finance has elected to exit the retail forex trading space and “focus solely on institutional clients and services.” It has been transferring its accounts to Hantec Markets Limited over the past several weeks, due to restrictions placed upon it by the FCA. These moves are but the first of many expected reactions in the industry in response to major regulatory changes.
Should I stay or should I go? Forex brokers across the globe are asking this question. As a consequence, you may need to ask your broker what its plans are and then act accordingly. Stay cautious.
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