2016 – The year when some regulators woke up

2016 – The year when some regulators woke up

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2016 has been the year when the European regulators finally woke up to the fact that millions of Europeans are losing billions to the binary options and forex and CFD brokers and decided to put an end to the feast.

This will most certainly have its implications in the upcoming 2017 and the years to come, but only time will tell how and whether the changes will affect the forex, CFD and binary options brokers and their clients and whether the changes will be for the better.

France

The first one to raise the alarm was France’s AMF, whose annual report found that in 2015 the complaints against forex and binary options brokers in particular, soared. The same report quoted data of the Paris city prosecutor’s office, according to which the French have lost to fraudulent binary and forex brokers 4 billion euro in the past six years.

The first practical steps the AMF took weeks later with the proposal to ban the advertising of binary and forex brokers and their services. The text was incorporated in the so-called Sapin II bill, whose main goal is to improve transparency, combat corruption, facilitate the modernization of the French economy. The Article 28 of the bill, however, introduced a ban on “all promotional (advertising) communication from investment services providers to unprofessional clients regarding investment services for financial contracts which are not traded on a regulated market or through a multilateral trading system and whose maximum risk is unknown at the time of purchase, or for which the risk of loss is higher than the size of the initial investment or when the potential risks are not clearly understood in the context of eventual corresponding benefits.”

The AMF is still to formulate the exact definitions for those products, but they would most likely be binary options and contracts for direct or indirect investments in forex and CFDs with a “leverage greater than 5”. The administrative fines will be of up to €100 000 and can be imposed to all parties “involved in any way in the creation or distribution of advertising on risky financial contracts”, such as advertisers and broadcasters.

It is expected that the ban will come into effect in January 2017.

Belgium

Without much ado, Belgium’s regulator, the Financial Services and Markets Authority (FSMA) followed suit and from August 18 banned “the public marketing of derivatives”, or “the distribution of derivatives”. In essence, from that day on, distribution of forex, CFDs, and binary options among Belgian retail clients was terminated.

Netherlands

In the autumn it became cleat that in the Netherlands the finance ministry and the local financial markets regulator Authority for the Financial Markets (AFM) are conducting consultations on banning the advertising of certain financial products. Among them, according to reports, are binary options and some CFD’s, the AFM has dubbed “toxic investment products for consumers”.

“We consider it very important to introduce an advertising ban on binary options and other toxic investment products”, said Merel van Vroonhoven, chair of the AFM Executive Board. “Advertising for these investments entices consumers with the prospect of earning money fast, but it is actually the case that you can easily lose all of the money you have put in” In accordance with the advice issued by the AFM to the Minister, it is being assessed how the advertising ban could be structured and to which investment products it should apply.

There have been no further developments on the matter, but the late autumn saw a new surge in regulation activity.

Cyprus

The first one was the Cyprus Securities and Exchange Commission (CySEC), which issued a consultation paper that set a 1:50 leverage cap on CFDs and banned trading bonuses.

The regulator also introduced some rules on the processing of client withdrawal requests, which must be processed on the same day.

In conclusion, the CySEC gave the forex and binary options brokers until January 30, 2017 to take the appropriate measures and actions in order to operate with the new rules. From then onwards, the regulator intends to “conduct thematic reviews” to ensure they are complying with them, as well as with the general provisions of the law. In case of infringement, the CySEC will take relevant measures.

CySEC is one of the regulators preferred by a large number of forex and binary options brokers and the reasons for this are several. On one hand Cyprus is an offshore zone with somewhat lax legislation and company oversight. On the other Cyprus is a member of the EU and this means the companies registered and regulated by the CySEC can do business in the entire EEA – EU, plus Norway, Iceland and Lichtenstein. It is yet to be seen how the new Cyprus requirements will affect the brokers, as the deadline for implementing them is in January 2017.

UK

Mere days after CySEC another major regulator – UK’s Financial Conduct Authority (FCA) announced its plans to set a cap of 1:50 on the leverage for trading in CFDs and ban the trading bonuses.

The consultations are still ongoing and it is not clear what the final outcome will be, but the mere announcement of intentions already had a significant impact. The stock prices of some of the largest UK forex and CFD brokers like IG Group, CMC Markets and Plus500 dipped and wiped out a considerable portion of their market capitalization.

Meanwhile, IG Group, CMC Markets and City Index said they are forming an association to respond to FCA’s plans.

A few weeks later surfaced reports that CMC Markets is thinking of relocating a significant portion of its business to Germany.

Germany

CMC Markets’ plans could, however, be abandoned, as Germany’s financial markets regulator BaFin said it is planning to ban the marketing, distribution and sale to retail clients of CFDs with an additional payments obligation. In essence this would mean that margin trading in these products could altogether be banned.

BaFin’s plans, like those of all other regulators, are prompted by concerns that more often than not the retail clients do not clearly understand the risks of margin trading in leveraged products and that their losses could often exceed their funds.

Like we already, noted, it is yet to be seen whether the plans will come into fruition, how this will affect the brokers and whether they would have the desired effect. Hopefully all this is for the better, but only time will tell.

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