ESMA, National Regulators Examine Broker Data

Reclassification to professionals and moves to third-country subsidiaries prompt regulatory vigilance

Six months into the new regulatory regime in Europe, last week the ESMA extended the temporary provisions for another three months. The restrictions on retail traders, which took effect in August 2018, are still here and aren’t likely to disappear anytime soon.

In the meantime, the regulators are keeping busy. After Finance Magnates exclusively reported on the data-collection effort on part of the FCA, the latest extension of ESMA’s restrictions to marketing CFDs to retail clients signals vigilance on part of EU regulators.

The data, which the FCA asked brokers to submit in November, was comparing retail and professional clients. The extensive sample acquired by the UK regulator permits it to assess which companies’ clients have been more driven to reclassify to professionals.

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This in itself isn’t necessarily an issue, but EU authorities could go a long way to investigate communication on the part of brokers.

Reclassifying to a Professional Client

The prospect of a detailed regulatory review of the practices used by retail brokers across the EU to inform their clients about an alternative way to use high leverage could be high. The reclassification to a professional client can be both easy and difficult.

For the purposes of staying in line with the latest trends in the industry, this author attempted to reclassify to a professional client with some brokerages across the EU.

While some regulators used a very diligent process of reviewing my application and asked me for supporting evidence of my qualifications, others simply took me at my word, sent me to a page where I could mark two out of the three professional clients requirements and apply for the new status.

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While not being a compliance expert, a different approach by different companies doesn’t look promising. The datasets collected by EU regulators and the FCA (we still count it as EU) last year should be indicative of the different practices used by different brokers.

Industry chatter suggests that brokers have been pretty actively looking at each other. Now that the industry is put under scrutiny, active players are closely examining their competition. If history is any guide, regulators have been slow in responding to complaints from brokers about each other’s practices, but they do respond.

The root of this issue is the fact that professional clients requirements as classified under MiFID are quite vague. Different compliance experts interpreted those differently which could have produced different strategies on reclassifying a client into a professional.

If anything, we can expect that the ESMA will issue strict guidelines on how to reclassify to professionals. The MiFID II definition leaves a lot to be desired. Starting from what is a “significant size” of transactions and continuing with whether brokers need to request proof of employment in the financial industry from the client.

Marketing Third Countries Options

As the ESMA noted in its announcement on Thursday, it is aware that some companies have been moving clients to third countries. Current rules permit such a move to occur only if the client explicitly requests such a transfer.

In private conversations, some brokers have expressed their concern about the practices of their competitors in this regard. A casual mention of the offices of the company across the globe is seen by competitors as a suggestion to move accounts to third countries.

Regardless of whether such content is intentional or not, regulators are very likely to be examining closely any complaints from brokers about their peers. Investigations about the practice to move clients to other jurisdictions will also be helped by cooperations with regulators in the relevant areas.

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