Analysis: Binary and FX Brokers Widely Abused French Market Before Advertising Ban

A day after the introduction of the ban on binary options and forex advertising in France we take a look

After months of threatening action, yesterday French authorities finally delivered on its advertisement ban threats for binary options and forex companies. The local industry could be severely impacted, by what a number of offshore companies have done to the market.

Years of abuse by offshore binary options and forex brokerages, some of whom have been accessing the market unauthorized, with others simply ignorant of the rules and ripping off clients unpunished, have yielded the drastic step taken by France.

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As in every decently regulated country, local authorities have been receiving complaints from clients of companies that have treated them unfairly and ultimately took action. The ban of digital advertisement of binary options and forex offerings in the country comes after authorities have been repeatedly signaling to the market that they know what has been going on.

The AMF Blacklist

The French regulator, the Autorité des Marchés Financiers (AMF), has probably been the first European watchdog to start promptly maintaining and updating a list of companies that have been unlawfully operating in the country, abusing their clients in a variety of ways. The regulator still regularly refreshes its list and adds new names to it.

While the European legal framework has not permitted the country to ban the opening of trading accounts at other companies like the U.S. has done, the French watchdog has started its campaign to provide some degree of protection to the prospective clients of financial services in the country.

October 2014: A Profitability Study 2009-2012

A study by the AMF on the profitability of clients of forex and CFDs brokerages was first published in October 2014. The regulator highlighted the risks for clients that are engaging in trading risky financial products.

According to the final results released at the time, after four years (!!) of studying the market, the AMF discovered that 89 per cent of depositors were losing money. With the average loss coming in at almost €11,000, the French financial markets supervisor got worried about what was going on.

The same study established that for the period of four years which it encompassed (between 2009 and 2012), a total of 13,224 customers experienced aggregate losses of nearly €175 million. At the same time, the 11 per cent, which totaled 1,575 customers, earned combined profits of €13.8 million.

A big number of companies operating on the French market chose to ignore the announcement by the regulator and continued to look for churn and burn clients. Aggressive sales tactics, false promises about massive returns and unsolicited cold calls have been the norm in France. What these practices have yielded was a mystery shopping study involving a number of regulated companies.

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April 2015: The Mystery Shopping Study

The French regulator has been actively studying the binary options and forex markets and in 2015 published the results of a mystery shopping study. The results were shocking to say the least – after depositing certain amounts at 9 brokerages, the regulator’s spotters managed to recover their funds from only two companies. Eight of those brokerages were regulated in Cyprus.

This is where it gets interesting, as this could have been the first major alarm bell for the AMF to complain about the Cyprus Securities and Exchange Commission’s (CySEC) lack of supervision. The European Securities Markets Authority (ESMA), which is the direct supervisor of all European financial regulators, has applied substantial pressure on Cypriot authorities to rein in their brokers.

The results from this pressure were the fines against a number of companies which became more substantial only at the end of last year. After levying a number of fines, CySEC hasn’t stopped and continues introducing new regulations and more actively enforcing its obligations as a supervisor.

For the AMF this was too little, too late – the regulator has already identified that too many companies didn’t care about complying with any of the European regulations and that CySEC has failed to supervise dishonest Cyprus Investment Firms (CIFs).

May 2016: An Imminent Ban

Finance Magnates reported back in May this year that French authorities basically committed to a ban on the advertisement of binary options and forex brokers. What we didn’t know at the time were the details. But with the decreased profitability of clients directly linked to the higher leverage, the decision from yesterday makes sense for the clients, and the AMF has committed to protecting these clients.

If anything French authorities could be the first to introduce such draconian measures (1:5 cap on leverage), but they won’t be the last. In 2015 we saw Poland introduce a cap on leverage at 1:100 (a move that also came after a dismal profitability study). That has been strictly adhered to by EU regulated brokers that offer their services in the country and there hasn’t been any drama.

The French approach has been to introduce a cap on leverage for brokerages that are advertising their services and therefore create a bubble of companies that are more caring to provide true STP services that are catering to more savvy clients.

The cap on leverage worked in Poland and it is likely to work in France. The Japanese market has had the maximum leverage limited to 1:25 for a number of years and it is still leading the way in retail FX volumes. True, the advertisement ban will affect businesses looking at the French market, but it will make the industry more resilient in the long run if the level is reasonable and not the current proposal of a 1:5 leverage limitation.

August 2016: The Ban Set to Become Law

Brokerages can only take one cue from yesterday’s announcement by French authorities – whenever there is focus on the industry, regulatory actions will follow. This regulatory action will continue until client complaints decline. This has always been the case not only in financial markets regulation, but in pretty much any industry that is overseen by the government.

We live in a vibrant environment when sometimes fraudulent entities are affecting the sustainability of businesses worldwide. The industry has nothing to do but to engage in some self-policing as well if it wants to continue operating in a fair and sustainable manner.

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