Exclusive: VISA’s Unregulated Brokers Crackdown to Cause Pain Offshore

In the past, the payment providers industry hasn't been a sector of the retail broking space on which media outlets have put a lot of focus. That changed this year when Finance Magnates reported on action taken by Mastercard to limit the operations of unregulated brokers.

At the time, Finance Magnates speculated that it was only a matter of time before VISA joined in. On Friday, Finance Magnates reported exclusively that VISA is following in Mastercard's footsteps and will classify the brokerage industry as high risk.

Card providers are actively cracking down on unregulated and unlicensed brokers. Both VISA and Mastercard are considering brokers, which are not licensed in the country where they are operating, as gambling providers.

What does this mean: for starters, clients can make a chargeback on their payment for up to a year and a half. Any systemic transaction disputes can make it hard for acquirers to provide services to retail brokers.

The Details

After examining VISA’s letter to acquirers Finance Magnates identified some key details to keep in mind. First, the businesses in question include binary options and “synonymous products”; rolling spot FX trading, financial spread betting, and contracts for difference.

Brokers providing the above-mentioned products are rated equally to providers of betting, lottery ticket providers, casino gaming chips, off-track betting, and last but not least, wagers, and race tracks.

All of the above must be marked by acquirers with a high-risk code. The so-called Merchant Category Code (MCC) in this case is 7995. The institutions processing the transaction need to be registered as a high-brand risk acquirer. You can guess how many companies are willing to carry this risk.

Acquirers will need to conduct an immediate review of any clients offering said products. The move made by VISA and Mastercard aims to make the transaction processors an effective police over their customers.

“Acquirers are encouraged to investigate binary options, rolling spot Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term trading, financial spread betting and contracts for difference merchants that conduct a disproportionate amount of cross-border transactions and immediately terminate any sales into markets where such transactions are prohibited,” VISA’s letter states.

Regulated Brokers Exempt

Brokers which are regulated by the authority in the country where the service is provided are exempt from these rules. As already mentioned, Mastercard’s rules are already in place, while VISA will introduce similar measures on December 1.

On their part, acquirers must apply for, and be granted high-brand risk acquiring privileges. This action needs to be undertaken before contracting with any companies classified as high-risk.

Did EU Regulators Ask for Help?

The timing of announcements by VISA and Mastercard raises suspicions that the companies' efforts may have been coordinated with Google, Facebook, and EU authorities to introduce a safety mechanism for the new EU regulatory framework.

As long as there is no evidence to support this theory, it remains just that - a theory.

Time will tell if the measures are going to be effective. The rise of offshore subsidiaries founded by EU-regulated brokers has been remarkable. Whether EU authorities will manage to limit deposits to such entities remains to be seen.

For the time being, ESMA’s regulatory framework seems to have had only one major effect: both brokers and traders are looking for legal alternatives how to trade with high leverage and avoid the cap.