With the new focus of brokers in Europe and globally being centered on higher-value and professional clients, especially after the ESMA changes last year, brokers have been facing new challenges.
While some customers are happy with traditional insurance from the UK Financial Services Compensation Scheme (FSCS) and the Cyprus Investor Compensation Fund (ICF), others are looking for more protections.
Solutions are widely available on the market, but not all are created equal. That creates risks for retail and professional clients of brokers of being misled by the insurance policy posted on a broker’s website. Some of those are created to strictly protect bondholders instead of end-customers who are holding client funds with the brokerage company.
Lloyds of London Insurance Market
In the aftermath of the Great Financial Crisis, as US broker-dealers have started using a product called excess Securities Investor Protection Corporation (SIPC), a lobbying effort started in London to create a similar product for retail brokers.
Called excess FSCS insurance, the goal has been to have underwriters provide additional security and protection to investors and traders and promote greater confidence in the market as a whole.
Nowadays, with the shift in the regulatory landscape of the forex and CFDs brokerage industry, companies which are regulated offshore have also started looking into ways to reassure their customers.
A Point of Reference
Some brokers are already using insurance policies to differentiate themselves from the competition. Both their existing and prospective clients have an added layer of security. Australian brokers have already started looking at their options in the aftermath of the changes to the local regulatory environment.
One company which has committed to deliver additional protection to its clients is ActivTrades. Finance Magnates spoke to the company’s Finance Director, Juan Scarabino to find out more about the evolving needs brokers and their customers.
“Clients within the industry value funds protection and we believe it is imperative to provide them with a considerable level of security within the markets. Our insurance is available to clients in and outside of the EU, as we offer it to all our customers as standard,” Scarabino explained.
Can ODPs Bring Transparency to South Africa’s FX & Derivatives Industry?Go to article >>
With such policies representing an additional cost to brokers, the amount of insured funds varies between different jurisdictions. For ActivTrades, 100% of the deposits of its clients up to £1 million or $1 million are protected.
“Our policy is with QBE Underwriting Limited and other participating syndicates at Lloyd’s of London, one of the world’s largest insurance companies. The policy insures individual client funds up to £1,000,000 in excess of the UK FSCS which is £85 000. In the Bahamas where no such scheme exists, we offer insurance up to $1 million with a competitive excess of only $10 000,” Scarabino elaborated.
Multiple Jurisdictions Support
One of the persons who are deeply familiar with the industry and its needs is Umar Awan, Associate Director at Willis Towers Watson. Following the success of the excess of FSCS product and inquiries from brokers around the world requesting similar insurance to protect their clients, the company developed a solution that could protect client funds in any jurisdiction globally.
“As you know there are challenges facing the broking industry both with Brexit and in particular the ESMA changes. Brokers are offshoring to areas outside the UK & EU to offer clients more leverage. We have recently put together similar policies in the Bahamas, Cayman, St Vincent, Australia, Jordan and are currently working in Malta, Luxembourg and South Africa,” Awan explains.
While some brokers are working to insure their clients however, others are misleading them by pointing to a different type of insurance policies. Instead of protecting clients deposits, those are designed to protect different parties instead of client money holders.
Spotting Misleading Advertising
As it turns out, spotting misleading statements from brokers turns out to be a difficult task. Some companies in the industry are misrepresenting their policies for professional and civil liability. At least two EU regulated firms are misusing their policies in such a way. Their policies are designed to cover the cost of any claims made against the broker in the professional services they provide and are not to the benefit of their clients.
Mr Awan elaborated on the matter: “There are brokers now who are advertising falsely to their clients about the insurance they have taken out. Unfortunately, there seems to be no one clamping down on this behavior and clients are being misled with what brokers are advertising.”
Unfortunately, it is very difficult to tell the difference for an untrained eye. Advertising the wrong kind of insurance that is completely misleading and to no benefit for customers trading is one prospective challenge which regulators, brokers, and underwriters need to address.
“I regularly get customers approaching me for confirmation about the brokers insurance and asking me to confirm the validity. The London insurance market uses professional consultants who conduct due diligence on the broker interested in buying the insurance, looking at their financial strength, regulatory filings and risk procedures as well as looking at the macro environment of each jurisdiction and the capital and regulatory requirements, and other criteria,” Mr Awan explained.
With the industry clearly changing, and a big part of it moving offshore and to professional clients with higher demands, insurance products are likely to continue to be in demand. Solving misleading advertising however is clearly a challenge and both brokers and underwriters need to find ways to solve that, while regulators are focused on firms using the misleading type of policies.