The Cyprus Securities and Exchange Commission (CySEC) has issued a circular to the Cyprus investment firms setting some new rules regarding trading bonuses, maximum default leverage and fund withdrawal processing terms. In essence the new rules concern all forex and binary options brokers regulated by the CySEC.
In its circular the Cyprus regulator says that the 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 as it is unlikely that a firm offering such bonuses could demonstrate that it is acting honestly, fairly and professionally and in the best interests of its retail clients”.
CySEC notes that the brokers offering “excessive leverage” to retail clients are most likely not doing it in the best interest of the clients, hence from now on all forex and binary options brokers should design their trading systems to set as default a lower leverage and give them the option, if they wish, to change the leverage to a higher level. Further in its letter CySEC sets the maximum default leverage as 1:50.
They also added some new rules about money withdrawals. In its circular the CySEC also sets a rule that in case of a positive cash balance in a client’s account brokers must process the client’s fund withdrawal request on the same day it was made, or the next working day if the client’s request is received outside of normal trading hours.
In conclusion, the CySEC gives 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.
1 week later, FCA announced its new regulatory proposals even harsher on the heels of the CySEC , there is a hard cap on leverage and an experience threshold for clients with less than 12 months to have leverage set at 1:25. There is also an all-out ban on bonuses of any kind regardless if it is related to trading or account opening.
An added level of transparency added to the regulations as brokers must now disclose the profit loss ratio of the clients. The FCA is taking the approach that products like CFDs are complex and the retail public has not been adequately informed of the risks.
What will this mean for brokers going forward? The bonus ban probably won’t hurt the larger brokers but will hurt the mid-size and smaller firms. We might see some firms looking to exit as these rules might impact them in an already highly competitive environment. These moves may also lead to consolidation as brokers decide if a stricter regulatory environment is right for them.
The FCA move looks eerily like those taken in the US by the NFA and CFTC back in 2008 and 2009. The one major difference being the $20 million plus net capital requirement. Those moves resulted in a drastic reduction in the numbers of brokers and the impact is still being felt today. The question remains will UK brokers suffer the same fate as those in the US did?