Analysis

What will Regulation Look Like Post COVID-19?

How will regulation be influenced by this unprecedented event?

The coronavirus pandemic has had a widespread impact – on the way we live, do business and more. In fact, there are few aspects of life that the virus hasn’t influenced in some way.

The effects can also be clearly seen in the foreign exchange (forex) and trading markets. Namely, COVID-19 brought a surge of volatility back into the markets, with the most heightened period spanning across February and March.

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As Finance Magnates recently reported, heightened volatility has made the FX and trading markets more attractive than ever, and a new wave of traders have flocked to the space. These range from first-time traders to dormant traders having a renewed interest in their investment portfolio.

Whilst overall, the pandemic has provided a boost for the markets and the brokers that operate within this space, it has not been without its challenges. Numerous trading platforms and exchanges struggled with the higher levels of trading activity, a surge of COVID-19 related scams came to the surface, and security systems were tested as hackers tried to take advantage of staff working remotely.

Influence on regulation

All of this begs the question – how will regulation be influenced by this unprecedented event? With the traders coming into the industry – will regulators across the world clamp down further on retail trader protection?

In a recent speech, Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the Financial Conduct Authority (FCA) said that regulators need to be agile during times of change.

“We will capture the lessons from this emergency about delivering quickly. But we also need to look at our entire system, from the data and intelligence we collect, how we decide which firms and individuals to allow to operate and how we supervise them, to how we ensure that unacceptable firms and individuals are stopped and removed from the regulated sector as quickly as possible,” Butler added.

ESMA to focus on business continuity and system resilience

Alexandros Constantinou, Director of MAP S.Platis and MAP FinTech
Alexandros Constantinou, Director of MAP S.Platis and MAP FinTech

Speaking to Finance Magnates, Alexandros Constantinou, the Director of MAP S.Platis said: “While ESMA and other regulators have decided to extend a few upcoming reporting obligations or proposed amendments to upcoming regulations accounting for COVID-19 economic uncertainty and business disruptions, so far there is no indication that additional regulation is proposed as a response to COVID-19. 

“ESMA acknowledged in its Quarterly Risk Dashboard publication that COVID-19 induced trading activity did not have a significant impact on EU infrastructure while it exacerbated the issues of systems’ security, especially for online trading as attempts by hackers to infiltrate trading systems remained high. 

“Based on the above, our view is that currently the attention of regulators is to focus on business continuity and system resilience, managing risks and adherence with MiFID II principles rather than introducing new regulation. Nevertheless, we expect that after the end of the pandemic regulators will draw lessons and where necessary adjust the existing regulatory framework.”

ASIC remains focused on CFDs

Over in Australia, FX and CFD market participants wait in anticipation. As Finance Magnates reported, in August of last year, the Australian Securities and Investments Commission (ASIC) published its consultation paper which proposed to ban binary options and place leverage restrictions on CFDs.

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Since then, the Australian regulator has received a large response and is yet to actually implement its proposed changes, even though 10 months have passed. In recent months the agency has readjusted its priorities in wake of COVID-19, in which the watchdog said it would be postponing some of its plans to focus on issues that needed its immediate attention.

However, as pointed out by Sophie Gerber, the co-CEO of TRAction Fintech and principal of legal firm Sophie Grace, the regulator left out any mention of its consultation paper on CFD restrictions. More than that, ASIC published a report in May, which highlighted that retail traders posted net losses of AU$234 million from trading CFDs from the 16th until March 22, 2020. 

Regulation might come to Australia before end of year

This shows that although the regulator has yet to announce anything further regarding its product intervention measures, client losses and retail investor protection when trading CFDs still remains at the forefront of the authority’s mind. Because of this, according to Gerber, we might see the implementation of these measures later this year.

Sophie Gerber of Sophie Grace and TRAction Fintech
Sophie Gerber, a Director at Sophie Grace and TRAction Fintech

“So we are anticipating that a version of the product intervention against CFDs will be released before the end of 2020,” Gerber explained. “We are encouraging our clients to start taking steps to review the draft order and make the necessary preparations to be able to meet the conditions once they come in, as the lead time for some of the requirements is quite short.

“We are also expecting ASIC to strengthen its enforcement on retail client money rules as recent audits have shown gaps in the current drafting which have allowed for a variety of interpretations and implementations. Likewise the increased amount of information being fed to ASIC on at least a monthly basis in client money reconciliations necessitates that they review and analyse the meaning and implications of what they are receiving.

“The very nature of the information being provided opens itself up to manipulation by dishonest participants wanting to feign compliance and probably doesn’t really pass a probity test.”

Europe: changes may come in Q4

In Europe, Constantinou believes we might not see any regulatory changes before the final quarter of this year, as MiFID II is currently in its third year of implementation.

“The European Commission published an impact assessment on MiFID II in February 2020 as well as invited feedback from market participants on various aspects of MiFID II,” he continued. “The feedback phase closed on the 18th of May 2020. However, the Commission does not expect to propose any new rules before the 4th quarter of 2020. As such, we do not expect any additional regulation in the medium term but rather enhanced supervision and guidance in the form of Guidelines, Circulars within the existing regulatory framework.” 

COVID-19 highlights risk management weaknesses

The coronavirus pandemic has brought many issues to light, especially infrastructure resilience, security and risk management, which, as Gerber outlined, has been identified as the biggest area for improvement in many businesses.

“The nature of the requirements such as preparing risk registers which analyse likelihood, impact, treatments and controls for a variety of risks (e.g. financial and human resources) are difficult to turn your mind to when trying to run a small business and therefore have been largely ignored by many providers,” she added.

“This also applies to conflicts of interest and business continuity requirements that apply to licensees. For example, we are seeing an increased interest from auditors in the viability of businesses that are heavily reliant on related overseas entities for ongoing capital and resourcing. Attention is being paid to businesses with no profits in Australia or profits that are being scraped and sent to a parent company on a regular basis leaving the AFSL without sufficient capital buffer to withstand economic shocks which in theory could leave clients of the AFSL significantly exposed.”

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