Brokers Breaking Rules With Offshore Activity

Showing clients that they can go offshore for higher leverage is against ESMA regulation

On Tuesday, Finance Magnates found that some European-regulated brokers are referring clients to their offshore entities that will allow them to trade with higher leverage.

Many in the retail trading industry will be thinking, “so what?” For them, this practice is not problematic as they appear to believe that it is not against regulations.

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But over the past couple of days, we have consulted with a number of compliance experts who believe that the opposite is true.

Regulations put out by the European Securities and Markets Authority with regard to the practice are superficially vague. As long as a client signs up to a service of their own volition, common wisdom goes, there is no problem with providing them with services.

Of course, this allows for some wiggle room. What does it really mean if clients sign up of their own volition? If you choose to show them different leverage options and they pick an offshore entity, does that mean they chose to do it themselves?

The answer to this is “probably not.”

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According to a legal expert that Finance Magnates spoke to, ESMA is in practice very strict about what constitutes a referral.

In effect, if a broker has anything on their website that suggests or implies that clients could move to an offshore entity, then the clients – if they do sign up to that company – are not considered to have made that decision by themselves.

This is the case even if clients sign a document saying that they chose to move offshore.

Aside from the legal expert, we also consulted with several executives at the CFD Trading and Compliance Forum. They confirmed that even minor efforts to show that clients can trade at offshore entities are likely to be against regulations.

“Firms should be conscious that they do not breach any MiFID rulings on financial promotions when engaging with clients on group matters,” said a spokesperson for the organization.

“An invitation or inducements to carry out a regulated activity would fall under would be deemed as soliciting and relevant permissions would be required. ESMA clarified this by way of their terms under Article 3 in the ESMA Production Intervention text, they explicitly stated that firms should refrain from circumvention activities.”

 

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