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 Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term.
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.
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."
No more leverage comparisons
According to a legal expert that Finance Magnates spoke to, ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term 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."
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 Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term.
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.
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."
No more leverage comparisons
According to a legal expert that Finance Magnates spoke to, ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term 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."