Last year ended with quite some interesting updates coming from the European regulators of the retail Forex brokerages. All of those updates are actually in line with ESMA guidelines, meaning that the local regulators are simply doing (or sometimes overdoing) what European Securities and Markets Authority is telling them to do. Today we are going to take a look at the most recent updates, analyze them and draw some possible conclusions.
As we have mentioned before, the regulatory updates will be issued by every local EU regulator, yet there are some regulators that have already expressed their attitudes. CySEC, which is a home for so many Forex brokers, expressed its wish to prohibit all of the Forex bonuses and other trading benefits unless a broker can actually prove that such benefits are useful for the trader. On top of that, none of the CySEC regulated brokers can avoid offering its services without a negative balance protection. And finally, each of the new clients that a broker onboards will have a leverage fixed at 50:1 by default, yet it is possible to set it higher upon the client’s desire.
Unlike CySEC, UK’s FCA provided way harsher requirements. While it also follows ESMA guidelines, prohibits FX no deposit bonuses and other promotions, demands the brokers to offer negative balance protection, it also seems to over-govern the brokers in terms of the leverage. FCA-regulated brokers will be able to offer a leverage of up to 50:1 to all of its clients. It will not be possible to increase that. However, unless a client can prove that he is a professional, a maximum leverage of 25:1 will be imposed.
There are more updates from the other regulators, like the full prohibition of FX, CFDs and binary options in Belgium and the ban on the FX and binary advertising in the Netherlands, there are still no defined guidelines made by other EU member states that would fully follow ESMA guidelines. However, it is possible to expect more countries to follow the Dutch way of giving a cherry on top for the FX brokers – a full prohibition on the ads.
What can we expect as a response in 2017?
There are three main trends that we can highlight as a possible response from the brokers.
#1 – Go unregulated
The first thing that is vital to understand is that retail FX sector is a very profitable industry and the brokers are unlikely to give it up easily. Whether the regulators prohibit advertising, limit the leverage, and restrain various promotions – the brokers will have their response. The most expected response for the brokers is to go unregulated. In simple words, currently, a CySEC or an FCA regulated broker has to pay substantial fees and employ costly compliance department to keep its regulation. It also needs to take more efforts to onboard the clients. However, when going unregulated, a broker will be able to have much more freedom, offer a better set of services (e.g. 500:1 leverage, trading bonuses etc) to its clients, and send quite some funds. A possible risk here is that some restrictions might be imposed by the payment service providers.
#2 – Go elsewhere
Another response from the brokers could simply be the shift in the market focus. We can expect the brokers to remove most of the marketing and sales staff from its European projects, as the client’s value will definitely become smaller. Brokers will definitely have better luck concentrating their efforts on the Asian, Latin American, African and CIS markets, as the regulation and the enforcement procedures tend to be not as harsh as in the other regions.
#3 – Continue promoting, but not a broker
Definitely, some of the brokers target high net worth individuals, people that would not trade with a leverage above 25:1 anyway. And such brokers will not give up on Europe. But what if the ban on FX advertising happens in almost every country? A possible response from the brokers would be to acquire or develop some analytics / educational Forex websites and promote those sites as a separate company. And then, to promote its brokerage services on such portals.
Summing it all up
It is clear that the year 2017 will change the retail FX industry once and forever. The effects of the regulatory updates will be way harsher than the ones experienced by the Black Swan Event during SNB. Nevertheless, the brokers are aware of the changes and have some decent time to prepare.