Coincidentally or not, just a day after the Cypriot regulatory regime was tarnished by one of the top executives in the industry, the watchdog has issued a new circular. The Cyprus Securities and Exchange Commission (CySEC) has informed Cyprus Investment Firms (CIFs) about certain considerations when trading bonuses are issued to their clients.
According to the circular, all companies which are crediting so- called “trading benefits” to their customers have to meet certain criteria. The regulator highlights that a number of CIFs are not issuing bonuses in full compliance with the rules and regulations which are supposed to be enforced by CySEC.
Brokers who are crediting bonuses do not explain sufficiently well to their clients the conditions associated with receiving them
The warning that CySEC is relaying to the CIFs hardly comes as a surprise. What is surprising is why the regulator has done nothing thus far to protect the interests of clients who have suffered from unclear and misleading marketing messages.
CySEC details that in many cases, brokers who are crediting bonuses do not explain sufficiently well to their clients the conditions associated with receiving them. In accordance with Cypriot law, brokers have to clearly illustrate with simple examples how the bonus can be used, if it can be withdrawn, etc.
This has been far from the standard practice across the industry for the past several years. It remains unclear why CySEC has merely issued a circular reminding firms to comply with already existing rules and regulations.
Any self-respecting regulator should have already been in the process of issuing fines to brokers who abuse bonus rules, rather than just issuing yet another warning in the form of a circular.
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CySEC also explains in the document that clients need to explicitly consent in written form to any bonus added to their account. The current practice is quite different – all clients of a brokerage are getting the funds added to their account without knowing about the conditions attached.
The regulator also explains that any short-term trading goals associated with the bonus credited to the account of the broker have to be reasonable. That said, CySEC only highlights what in many cases isn’t the case without defining what’s reasonable and what isn’t.
Clearly, there is no lack of understanding what the regulator means. The volume turnover on a trading account, which has been credited with a bonus, encourages traders to spend an obscene amount of time in opening and closing new positions. This eventually leads to them losing their credited bonus and their principal.
Aside from that, CySEC mentions that bonus conditions are frequently changed on the fly with the broker taking the decision to change the terms without the customer’s consent. Frequently, clients are not even informed about the changes.
CySEC ends the communique issued to CIFs urging brokers to review their trading conditions and begin complying with existing rules and regulations. Will this be the final warning before some action is actually taken?
Following is the full text of the circular distributed by CySEC to CIFs today.