Analysis: Dozens of Brokers to Move Offshore Due to ESMA Leverage Rules

Offshore and unregulated brokers are likely to risk consumer protection

As the European Securities Markets Authority (ESMA) is preparing to launch its new regulatory framework for retail brokers, compliance pressure is set to move many offshore. Despite payment processing and bank account registration hardships, brokerage companies that have been previously regulated in the EU are preparing to make an offshore move.

A number of industry insiders have shared with Finance Magnates their plans in the wake of the publication of the ESMA final regulatory framework for retail brokers which is expected very shortly. After the official publication in the EU’s regulatory framework in the Official Journal of the European Union, forex and CFDs brokers have two months until the new regulations kick in.

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While some companies have been working on products that are compliant with the new regulatory framework, others have chosen to go back to the old days of the industry and move offshore.

Peak Regulation

The supranational European financial regulator has gone very far when devising the new framework, and some traders are very unhappy with the limitation of their leverage options especially on CFDs outside of FX majors.

The ESMA has effectively put the market in a tough spot, where few brokerages would be surviving in the new market conditions. The part of the regulatory framework which was very likely overlooked by eurocrats is that clients of such brokers would continue to look for ways to trade with high leverage.

While binary options providers have been operating offshore for years, forex and CFDs brokers in Europe have chosen to set up shop in Europe and passport their regulation across the EU. The ESMA’s decision to limit leverage choices for consumers is only going to make things more difficult for traders.

Buying into the Dream

It was a little over 14 years ago when I became a retail forex trader. The main thing that motivated me to get hooked on the market was that I can change my life and get extra income thanks to the high leverage that was offered by brokers at the time. Mind you, that was about 1:100, not anything close to the 1:1000 and beyond what we see now.

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While high leverage has proven to be an obstacle to my successful trading, the dream that I was going to be able to change my life was the trigger that made me continue losing money for years. Experienced traders are not likely to jump onto the high leverage train, but the negative balance protection offered by so many brokers nowadays and the offering of various leverage options make the market home to many traders.

After all, we are all allowed to chase a dream and if that dream is related to predicting moves on the financial market, retail and professional traders alike are in for a rough ride. While the regulators worldwide have been more protective of retail investors in recent years, the result to the end-client is not always positive.

Offshore Risks

EU traders that choose to continue looking for high leverage options for their careers will end up opening an account with an offshore brokerage. Those that manage to select a decent offshore brokerage that is providing quality service to retail traders will be a minority by a big margin.

As history has taught us numerous times, despite offshore destinations regulating certain activities, such jurisdictions are rarely adequately protecting the consumers within a framework which is typically designed to accommodate as many as possible companies.  

Sure, Australia is still an option, but the likelihood that a coordinated approach on part of regulators doesn’t close this loophole seems remote to me. Regardless of whether a trader chooses to become a professional or is forced into looking at an offshore option, the levels of protection which EU residents currently enjoy is significant. 

Hot Sales Reloaded

Remember those leads which binary options brokers have been selling to each other for years. Well, regardless of the new regulatory framework those and certainly some new ones are yet to hit the market once more. Hot sales tactics are going to get revived and EU citizens will have dealings with unregulated and unsanctioned entities once more.

Especially those who are liable to fall for the get rich quick mantra propagated by unregulated call center employees. Worst of all, customers that fall for this are likely to end up trading with a brokerage where they literally can not win. While the ESMA will force brokers to display what is the percentage of traders that are making money, there are zero traders that make money with unregulated brokers. 

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