This article was written by Rod Martenstyn, founder and CEO OSS Consult Limited.
The next Jordan Bellfort
I think we all know the scene.
Someone stands on a stage, trying to convince the audience that they are a few short steps away from a lifestyle change, either with a second income or indeed giving up on full-time employment.
“See that Ferrari to my right, that could be yours. See the Rolex I’m wearing, or the Mont-Blanc pen I have, you can have these and change your life by following my financial trading academy,” they might say.
I wouldn’t say that all educators are like this, but certainly there are a significant number of them. Many claim to be professional traders, but most have not been a regulated individual under the FCA as a CF30 function, which typically means someone who claims to be a professional trader but is merely a retail trader themselves!
In reality, we know that for MiFID investment firms, an average of 75-80% of retail clients lose their leveraged trades on CFDs/FX (as per Finance Magnates findings).
So is paying thousands for financial trading education truly of any value in the long-term for retail clients? Or given that several educators also have a business model based on revenue share of clients that are introduced to investment firms, isn’t this merely a smokescreen to cover up an underlying conflict of interest?
Should financial trading education come within the scope of the national financial regulators? What should investment firms do where they use an educator as an introducer?
Has MiFID II changed the outlook for financial trading education? Should investment firms be more focused on investing in client directed tools such as 'Chasing Returns' or 'My Trading Skills' which enhance the trading experience for retail clients, and provide firms with more longer-term clients?
Below I have put together my thoughts on the subject of financial trading education, and how it may evolve. There are certainly measures that regulators should look to take, as well as investment firms themselves.
Are financial regulators turning a blind eye to financial trading education?
This question always confuses me. Regulators such as the FCA continuously monitor financial promotions of investment firms, yet there doesn’t seem to be the same oversight for a certain type of educator/speaker who thinks they are the next Jordan Belfort.
These may try to convince an audience of potential retail clients that by following certain trading strategies, they can change their lives for the better, whilst at the same time not explaining the risks of leveraged trading.
Quite simply, independent financial education does not come within the scope of FCA financial promotions, it’s not within the Perimeter Guidance (PERG). I do find this strange; if we are talking about the spirit of the rules, then surely someone who addresses an audience of retail clients and encourages them to pay money to learn to trade (and subsequently lose more money in trading in a live environment) should be a regulated person under a customer facing controlled function (CF30)?
I remember a television documentary about three years ago which was shown by the UK’s national broadcaster, the BBC, at peak hours, which talked about how to turn a £1000 into a whole lot more, by trading. I remember seeing one person on the documentary who lived on a farm, made millions on her demo account, and decided to finally trade on a live account.
Seriously, if the FCA allows the national broadcaster to essentially promote the industry to retail clients, because it falls outside the scope, isn’t it a bit hypocritical that they then target the investment firms who provide services to the retail clients who watched the TV show?
Life is often about cause and effect. If the FCA wants to have a holistic approach to acting in the interests of the 80% loss-making customers, then why has it not done more about regulating all of the causes? These include financial trading educators, academies, and national broadcasters, not just the investment firms.
What should investment firms do when engaging business with financial trading educators?
If you are an investment firm who is introduced to clients from a financial trading educator, then it is important that the following points are addressed:
1. What level of due diligence have you done on the educator? Warning signs are typically:
a. They claim they make ridiculous returns of say 80-90%.
b. “my clients don’t lose”.
c. “I’m a professional trader” (but you find little evidence of this).
d. Their seminars do not discuss risks of trading on Leverage
Leverage
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders
Read this Term
e. They focus their clients on lifestyle changes, e.g. the Ferrari, a second income
stream, giving up the day job.
2. Has your compliance department reviewed the promotional material the educator will be using?
This is important, as a compliance department should treat a seminar or website run by its educator introducer as a financial promotion and give sign-off accordingly before the seminar/engagement takes place. Remember that a retail client attending a financial trading seminar is likely to be sold on the idea of what they are hearing.
3. How are you going to pay your educator introducers?
If the educator is asking for either a volume or revenue share from the investment firm, then they should be shown the door, as not only is this a conflict of interest, but is likely to be in breach of MiFID inducement rules (which for the FCA is within COBS 2.3A). An educator introducer should be at most paid on the basis of a cost per acquisition (CPA) as an affiliate, which of course should be disclosed to the client before they engage with the firm. Please be aware, reverse engineered CPA deals would merely be viewed as circumvention.
4. What weighting do you give to financial trading education when comprising your appropriateness test scoring matrix?
It should not be given the same score or more as experience from trading in a live environment.
5. What education could investment firms themselves provide to harness longer-term clients?
Several investment firms now provide their own education to their clients, in order to enhance the client’s trading experience, and to bring some brand recognition and loyalty. This is all well and good, and should not be discouraged (and compliance departments should still be signing off educational collateral produced and distributed by the firm), however does this go far enough?
The scepticism of financial education within the think tanks of European regulators, such as the FCA, will still remain- that is, are the investment firms merely teaching their clients how to lose, given the retail client loss statistics?
6.Should CFD/FX investment firms complement their own education with truly independent financial education/Risk Management
Risk Management
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class,
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class,
Read this Term software and services to clients, such as those provided, for example, by Chasing Returns or My Trading Skills?
This would certainly show regulators that investment firms are truly trying to act in the customer’s interests, whilst from a commercial point of view, bring more longevity to the client lifetime cycle.
This article was written by Rod Martenstyn, founder and CEO OSS Consult Limited.
The next Jordan Bellfort
I think we all know the scene.
Someone stands on a stage, trying to convince the audience that they are a few short steps away from a lifestyle change, either with a second income or indeed giving up on full-time employment.
“See that Ferrari to my right, that could be yours. See the Rolex I’m wearing, or the Mont-Blanc pen I have, you can have these and change your life by following my financial trading academy,” they might say.
I wouldn’t say that all educators are like this, but certainly there are a significant number of them. Many claim to be professional traders, but most have not been a regulated individual under the FCA as a CF30 function, which typically means someone who claims to be a professional trader but is merely a retail trader themselves!
In reality, we know that for MiFID investment firms, an average of 75-80% of retail clients lose their leveraged trades on CFDs/FX (as per Finance Magnates findings).
So is paying thousands for financial trading education truly of any value in the long-term for retail clients? Or given that several educators also have a business model based on revenue share of clients that are introduced to investment firms, isn’t this merely a smokescreen to cover up an underlying conflict of interest?
Should financial trading education come within the scope of the national financial regulators? What should investment firms do where they use an educator as an introducer?
Has MiFID II changed the outlook for financial trading education? Should investment firms be more focused on investing in client directed tools such as 'Chasing Returns' or 'My Trading Skills' which enhance the trading experience for retail clients, and provide firms with more longer-term clients?
Below I have put together my thoughts on the subject of financial trading education, and how it may evolve. There are certainly measures that regulators should look to take, as well as investment firms themselves.
Are financial regulators turning a blind eye to financial trading education?
This question always confuses me. Regulators such as the FCA continuously monitor financial promotions of investment firms, yet there doesn’t seem to be the same oversight for a certain type of educator/speaker who thinks they are the next Jordan Belfort.
These may try to convince an audience of potential retail clients that by following certain trading strategies, they can change their lives for the better, whilst at the same time not explaining the risks of leveraged trading.
Quite simply, independent financial education does not come within the scope of FCA financial promotions, it’s not within the Perimeter Guidance (PERG). I do find this strange; if we are talking about the spirit of the rules, then surely someone who addresses an audience of retail clients and encourages them to pay money to learn to trade (and subsequently lose more money in trading in a live environment) should be a regulated person under a customer facing controlled function (CF30)?
I remember a television documentary about three years ago which was shown by the UK’s national broadcaster, the BBC, at peak hours, which talked about how to turn a £1000 into a whole lot more, by trading. I remember seeing one person on the documentary who lived on a farm, made millions on her demo account, and decided to finally trade on a live account.
Seriously, if the FCA allows the national broadcaster to essentially promote the industry to retail clients, because it falls outside the scope, isn’t it a bit hypocritical that they then target the investment firms who provide services to the retail clients who watched the TV show?
Life is often about cause and effect. If the FCA wants to have a holistic approach to acting in the interests of the 80% loss-making customers, then why has it not done more about regulating all of the causes? These include financial trading educators, academies, and national broadcasters, not just the investment firms.
What should investment firms do when engaging business with financial trading educators?
If you are an investment firm who is introduced to clients from a financial trading educator, then it is important that the following points are addressed:
1. What level of due diligence have you done on the educator? Warning signs are typically:
a. They claim they make ridiculous returns of say 80-90%.
b. “my clients don’t lose”.
c. “I’m a professional trader” (but you find little evidence of this).
d. Their seminars do not discuss risks of trading on Leverage
Leverage
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders
In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders
Read this Term
e. They focus their clients on lifestyle changes, e.g. the Ferrari, a second income
stream, giving up the day job.
2. Has your compliance department reviewed the promotional material the educator will be using?
This is important, as a compliance department should treat a seminar or website run by its educator introducer as a financial promotion and give sign-off accordingly before the seminar/engagement takes place. Remember that a retail client attending a financial trading seminar is likely to be sold on the idea of what they are hearing.
3. How are you going to pay your educator introducers?
If the educator is asking for either a volume or revenue share from the investment firm, then they should be shown the door, as not only is this a conflict of interest, but is likely to be in breach of MiFID inducement rules (which for the FCA is within COBS 2.3A). An educator introducer should be at most paid on the basis of a cost per acquisition (CPA) as an affiliate, which of course should be disclosed to the client before they engage with the firm. Please be aware, reverse engineered CPA deals would merely be viewed as circumvention.
4. What weighting do you give to financial trading education when comprising your appropriateness test scoring matrix?
It should not be given the same score or more as experience from trading in a live environment.
5. What education could investment firms themselves provide to harness longer-term clients?
Several investment firms now provide their own education to their clients, in order to enhance the client’s trading experience, and to bring some brand recognition and loyalty. This is all well and good, and should not be discouraged (and compliance departments should still be signing off educational collateral produced and distributed by the firm), however does this go far enough?
The scepticism of financial education within the think tanks of European regulators, such as the FCA, will still remain- that is, are the investment firms merely teaching their clients how to lose, given the retail client loss statistics?
6.Should CFD/FX investment firms complement their own education with truly independent financial education/Risk Management
Risk Management
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class,
One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class,
Read this Term software and services to clients, such as those provided, for example, by Chasing Returns or My Trading Skills?
This would certainly show regulators that investment firms are truly trying to act in the customer’s interests, whilst from a commercial point of view, bring more longevity to the client lifetime cycle.
