Key European regulators have recently made major progress towards their ongoing goal of implementing stricter rules within the Forex industry. Many of the newest requirements are aimed at ensuring that regulated brokers do provide their clients with a heightened level of transparency that meets the demands of the new MiFID II (Markets in Financial Instruments Directive) directive. These requirements have led many brokers, especially those which are CySEC regulated and operating within Europe, to have serious concerns about their future.
The new MiFID II rules are set to take effect on January 3, 2018. Even so, there remain many ongoing concerns on the part of financial firms and brokerages with regards to important deadlines and a basic understanding of specific rules. MiFID II is set to drastically change the regulatory landscape in the coming year. While companies have had adequate time to prepare themselves for the change, some remain either completely unprepared or slow in adjusting to meet the forthcoming compliance requirements.
What are in The Rules?
Among other things, the latest rules restrict the provision of bonuses, a perk which has long been beloved by traders. Brokers must also now offer a minimum leverage setting of 1:50. Because of this, many companies have moved their business to one of several countries with reduced regulations in order to retain their client base by delivering the same familiar services. Larger brokers seem to be doing the exact opposite, instead making changes to their business which meet the new regulatory requirements and are prepared to follow the new rules.
The most significant feature of the MiFID II is the required level of transparency. The directive creates a single system of supervising the market by regional regulators, and also requires the disclosure of data to clients both prior to and after trading.
MiFID also requires the implementation of major adjustments in requirements for the client evaluation process in an effort to provide them with more appropriate services as outlined by their personal user profiles. The newest regulatory requirements should strengthen competition within the industry, produce secure conditions for trading, and enhance confidence in European forex broker regulation.
The anticipated response on the part of many brokers still remains in questions, it seems clear that there are a few primary responses to be expected. The first of these would be simply to offer services as an unregulated broker. The retail forex industry is extremely profitable and rather than lose all income, some brokers could decide to bypass the regulation process completely and continue to count on traders being okay with trading with an unregulated brokerage.
At the moment, a CySEC or an FCA regulated UK Option broker is required to pay considerable fees and to employ a pricey compliance department in order to maintain its regulation. It is also required to take more initiatives to onboard the clients that it provides services to. When unregulated, a broker is allotted more freedoms, and as such can offer a greater range of services such as better leverage, deposit bonuses, and more. The risk is that some limitations might be enforced by the payment service providers who work with these brokers.
Forex brokers may also decide to shift their key demographic in the marketplace. It is expected that some brokers will halt spending on advertising in the European markets, even eliminating sales staff that focus on European clients. Marketing efforts may shift to less regulated areas, such as Asia, Latin America, and Africa. In these places, regulations tend to be much less harsh and much more broker-friendly.
Brokers who target high net worth individuals are not likely to completely give up on Europe. However, a potential ban on FX advertising on a global scale is possible. One possible response would be to develop some analytic and/or educational Forex websites through which to promote their services indirectly.
Safer Trading for All Clients
The forex market has grown rapidly, as more and more individuals decide to test their skills with the trading of currencies and commodities. The oversight of regulated forex brokers and the importance of compliance has also advanced in conjunction with this growth. In the second half of 2017, there have been a number of changes to the regulatory system, especially on the part of European bodies, which have integrated stricter guidelines, more stringent enforcement and larger penalty fines.
Inevitably, forex brokers are now required to guarantee the protection of client capital, adhere to rigorous anti-money laundering procedures and guarantee the most effective execution of client orders. This increased level of management and obligation has resulted in better transparency within the forex marketplace.
Moving forward, additional changes and even more stringent oversight are expected. Nonetheless, it remains a profitable industry. Even as more rigid regulations come about, we can expect to see a stream of new products and services emerge in the coming months and years.