Regulatory Roundup: Global regulators respond to rising complaint levels

Chris Lee

The job of a regulator is never an easy one, nor does it ever end. With limited resources, a regulatory agency must set priorities and then focus on educating the consumer and ferreting out the bad guys, wherever they may lurk. The problem is that the bad guys are doing their level best to avoid the regulator’s net, an easy proposition, since the net is not very large in the first place. If a regulator goes after the big fish, then it may be embarrassed when fraud explodes amongst smaller enterprises, sending consumer complaints through the roof in no time at all.

As the regulatory community found out over the past few years, our largest financial institutions had hoodwinked them for nearly a decade by fixing foreign exchange rates on the side in what has been termed the largest forex scandal in history. Seven banks (Citicorp, JPMorgan Chase, Deutsche Bank, UBS, London-based Barclays, HSBC, and the Royal Bank of Scotland) pleaded guilty to having their hands deep into the cookie jar and have been fined severely, as a consequence. One analyst assessed the damage, as follows: “Investment analysts have estimated that the settlements for currency manipulation could be as high as $41 billion across the entire industry for all regulators. They believe liability for Deutsche Bank alone could reach $6.4 billion.”

Where were the regulators? At large financial institutions, regulatory staffs are ensconced within the organization, spending full-time on location to keep standards high. Zero-level interest rates set by central bankers and new regulations following the Great Recession made returns just a bit tougher to come by in banks. The result, as one insider opined, “If you ain’t cheating, you ain’t trying.” From 2007 until the story broke, ethical standards within our largest banks had taken a beating, all for the sake of greed. Regulators, however, were truly embarrassed and determined to step up their collective games.

While the regulatory community spent more time with major banks and defending themselves in the press, fraudsters basically had a wide-open playing field, especially in foreign exchange and the burgeoning hotbed of binary options. Shady business practices, along with outright fraud, rushed to the forefront on a global basis. Consumer complaints now began to inundate respective regulatory offices. As we recently reported, “The Autorité des Marchés Financiers (AMF), France’s securities regulator, revealed at a recent press conference that, in the last five years, complaints related to forex and binary options have gone from less than 100 to over 6,000 in 2015.”

France was only the tip of the iceberg, but, in this country alone, 25,000 victims came forward to cry foul, having lost an estimated €4 billion over a six-year period. Similar situations arose in other European markets, thereby forcing regulators in all regions of the globe to respond aggressively to the matters at hand. As a result, regulatory alerts and advisories from all manner of agencies are now commonplace in the daily news. These warnings advise consumers to steer clear of unauthorized brokers, to beware of “clones” in the market place, and to be sensitive to withdrawal delays, slippage and re-quotes, and the setting of fraudulent valuations at the end of option expiration periods.

Why is the foreign exchange market such a target for fraud?

The foreign exchange market is the largest market in the world, sporting daily turnover in excess of $5 trillion, but it is unregulated and informal, at best. Fully half of the trading volume involves large banks, insurance companies, hedge funds, and high net worth investors in what is called the Interbank Market. An electronic server network provides the required connectivity for participants to buy and sell currency lots of one million units and above, “24X7”, from Monday morning in Asia through Friday afternoon in New York. There are no formal exchanges, no ticker tapes of pricing data. Transaction rates are gathered by various data congregators and given as a proxy for what an exchange would produce.

Therein lies the advantage of a regulated exchange. Adequate controls can easily be configured to ensure transparency in pricing and order execution for all market participants. Such is not the case in the forex market. Exchange rates from Reuters may be delayed and subject to interpretation. Brokers with major turnover volume may use their internal trade data as emblematic of the market, while other data compilers may not represent the true market, unless they have a wide distribution of banks supplying buy and sell data from every region of the globe. There is no final tickertape valuation.

Financial securities exchanges have built-in security and control measures that regulators can review and audit, an easier task than having to deal with the vagaries of foreign exchange market machinations. Regulators are then the first line of defense in forex, but only in their respective jurisdictions. They cannot police brokers outside of their national boundaries, unless there is a cooperative treaty in place or there is a regulator in the foreign jurisdiction that is willing and able to provide assistance, not always the case in many circumstances.

As we noted above, regulators have responded aggressively to recent complaint levels by publishing warning advisories, producing “Red” lists of unauthorized brokers, fining and incarcerating perpetrators, and educating the public as to the risks at hand. Here is a brief roundup of global regulatory activities over the last few months:

The UK – The Financial Conduct Authority (FCA)

The FCA has become an aggressive watchdog, shutting down offending brokers and sending out advisories nearly every week. A few of the firms tagged recently by this regulator are: Trade-24, IBL Markets, ECN Markets, CMS Trader, MTA Trade, Go Markets UK, and Inter Global Limited. Offenders were unlicensed or “clones”.

France — The Autorité des Marchés Financiers (AMF)

The AMF has, perhaps, raised the greatest opposition to the shady practices currently pervading the binary options industry, especially the aggressive sales and marketing tactics of bucket shop operations in Israel. National bans on these cold-calling practices are now in place, and lawsuits are being filed on behalf of over 25,000 victims.

Belgium — Financial Services and Markets Authority (FSMA)

The FSMA tends to follow the lead of the AMF, but it surprised everyone when it banned not only the sales and marketing of binary options to its citizens, but also the trading in these instruments, as well. The agency is also concerned that crypto-currencies, the latest fad scam, pose many problems for consumers. They warn against “OneCoin” and noted that, “The FSMA once again warns the public of the risks associated with virtual currencies.”

Austria — Financial Market Authority (FMA)

Austria’s FMA became the first agency to warn of 10Markets, a binary options broker that claimed to be licensed in the UK, but no such registration could be found.

Italy – National Commission for Companies and the Stock Exchange (CONSOB)

Based on a multitude of complaints, CONSOB became the first regulator to issue an advisory against UniqOption and its related companies, AL–Trade Ltd, Al Group Ltd and Go Trading Technologies Ltd. The broker group operates out of the Caribbean island of Dominica, but is unregulated.

European Economic Area (EEA) – In General

In order to operate in the EEA, a broker must have a license from a national regulator and follow the directives of the Markets in Financial Instruments Directive, or MiFID. It is not enough to claim the latter and not do the former. Firms that are licensed by CySEC in Cyprus, an EU member state, and comply with MiFID may sell across the continent.

Israel — Israeli Securities Authority (ISA)

The ISA banned Israelis from trading in binary options back in March, while it contemplated a registration process for these brokers. Unfortunately, these firms still prey on citizens outside of Israel. Lawsuits are pending.

Canada — British Columbia Securities Commission (BCSC)

Each province in Canada has its own regulator. To date, there is not a single binary option broker licensed to do business in Canada. The BCSC and its other provincial regulatory brethren continually put out warnings against unauthorized brokers, the latest being for Option Financial Markets.

Belize — International Financial Services Commission (ISFC)

Belize is often cited as a jurisdiction where unregulated brokers gravitate, but to its credit, the ISFC has come forward to renounce both Trade24 and Profitable FX EA. The former firm actually displays a signed license on its website that the ISFC claims to be a forgery.

Australia — Australian Securities and Investments Commission (ASIC)

ASIC released warnings for two Hong Kong brokers — Ashton Cole Global Investments, acting as AC Global, and ToOptions, a brand owned and operated by Australian-based Marketag PTY Ltd.

New Zealand — Financial Markets Authority (FMA)

The FMA issued a warning against the Igot Bitcoin exchange, a participant in the Bitcoin crypto-currency network. The FMA claims that it owes its customers “hundreds of thousands of dollar and is unlicensed to do business in New Zealand.

United States – Commodities and Futures Trading Commission (CFTC)

The CFTC, along with the National Futures Association (NFA), polices the currency trading space, and like other regulators, they have been quick to point out the problems in the binary options arena and to publish a “Red List” of unauthorized brokers. The list contains 40 firms at present. The trading of binary options is only permitted in this region if they are traded on a regulated exchange. Two such exchanges exist today in the U.S., but the look and feel of the options is very dissimilar to foreign-based offerings.

Concluding Remarks

Fraud is often described as a balloon. If you press hard at one place, the balloon will only expand somewhere else. According to security professionals, you can never eliminate fraud, but you can at best contain it at acceptable levels. Rest assured that regulatory agencies across the globe are hard at work protecting your interests from these shady business practitioners and obvious fraudsters. They are not supermen by any stretch of the imagination. They have limited budgets and staff to carry out their duties, but their intentions are honorable.

Financial controls are never fun to administer, but, over time, they do tend to catch those that attempt to steal or commit blatant fraud against the general public. In order for you to defeat their schemes, you must be ever vigilant and skeptical. Check in with your local regulator from time to time. He is there to keep you informed of the latest fraud trends, provide assistance in knowing what and whom to look out for, and, lastly, to arrest and put away a few crooks along the way. To be forewarned is to be forearmed!

Chris Lee

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