The UK Financial Conduct Authority (FCA) has published a Perimeter Report for 2020-2021, highlighting complex issues and regulatory responses to the gaps in the country’s financial services industry.
Calling out the forex and contracts for differences (CFDs) trading platforms, the watchdog agency said that it has identified several brokers encouraging clients to trade with entities in third-country jurisdictions rather than their UK business.
These companies are using this method of introducing brokers (IBs) and affiliates to carry out the unregulated activities, the British regulator highlighted.
FCA’s regulatory requirements are very strict with strong limits on leverages and marketing efforts. However, offshore brokers can offer significantly higher leverage to retail traders and offer bonuses to motivate them to trade.
“We are aware that some providers of retail derivatives (CFD and Futures) are encouraging retail clients to trade with firms in third country jurisdictions, by using comparison tables to highlight that retail consumers can get higher leverage through third-country intra-group entities,” FCA noted. “Some firms have also failed to highlight the protection that retail consumers may lose by transferring their account, such as the loss of negative balance protection.”
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“This could also be part of a longer-term trend as firms become more global and deliver services predominantly via online platforms and mobile apps.”
Social Media Promotions
Moreover, the report elaborated that many of the promotional activities of the brokers are completed by ‘educators’ and ‘influencers’ on social media platforms, with the promise of positive returns on investments and promoting the potential to achieve a celebrity-like lifestyle by trading.
“We have found that educators and influencers often use images of holidays and expensive cars to promote the trading of CFDs and the returns that can be made,” the FCA added. “This conflicts with the standardized risk warnings that are in place for CFD providers, which show the majority of clients will lose money.”
The regulator has continued to bust such platforms and even flagged and banned a few such brokers from offering trading services within its jurisdiction.