Regulation 2022 Roundup: The Calm Before the Storm?

2022 remains turbulent for the regulators tackling rising inflation globally. And, the rate hikes have directly impacted the financial industry players. However, the financial services industry had no major regulatory reforms, especially in forex and contracts for differences (CFDs) trading.

That does not mean the regulators remained quiet about the industry's actions. Several small but essential reforms and remarks made by the regulator have had a massive influence on brokers.

"[European regulators] finalizing the new technical standards for EMIR 2.0 – EMIR Refit and rolling out the EU's flagship sustainable finance packages," said George Markides, MAP FinTech's Senior Manager and Head of the Compliance Assurance Department.

Australia, too, did not see any significant regulatory reform. However, ASIC commenced their enforcement of the new design and distribution regulations which began in October 2021.

"In particular, the need to have a Target Market Determination is coming under scrutiny as ASIC takes issue with how many financial services providers are describing the appropriate investors for their products," explained Sophie Gerber, a Principal of the legal firm, Sophie Grace and the Co-CEO of TRAction Fintech. Indeed, the regulator also took action against a few companies for inappropriate target market determination.

The regulations in the Aussie market were not confined to ASIC's actions. While targeting Australians with ads, Google advertising restrictions in Australia unearthed several providers operating without an AFSL. Those providers found their marketing channel cut permanently or until they could provide the appropriate verification.

Passporting in Question

The European Union, where a passporting regime of licenses is in place, witnessed some chaos among the regulators. The European Securities and Markets Authority (ESMA), the overall regulator of the 27-country bloc, acknowledged the shortcomings in the supervision of cross-border investment activities, particularly in the authority of the Cypriot regulator.

In response, the Cyprus Securities and Exchange Commission (CySEC) said it aims to increase the human resources needed to supervise cross-border services provided by Cypriot investment firms and "developed additional policies and initiatives to enhance the efficiency and effectiveness of supervision."

Furthermore, the French and Dutch regulators published an unusual statement noting that they "increasingly observe practices of financial firms obtaining a license and European passport in other EU member states than that of their target audience" and that these firms especially are prominent when it comes to "offering high-risk products (such as CFDs) as well as in terms of the complaints received from consumers on their practices."

"Therefore, the AFM and AMF asked to transfer supervision over those firms to them – a quite dramatic move, as it contradicts the very notion of a unified European market!" said Remonda Kirketerp-Møller, the Founder and CEO of Muinmos.

That's not all.

Earlier this month, the UK's Financial Conduct Authority (FCA) published a "Dear CEO" letter highlighting its continued concerns regarding the retail CFDs industry's problems and 'poor practices'. It pointed out the EU brokers operating in the UK under the temporary passporting regime and said its actions have stopped 24 firms from marketing CFDs in the UK in the last two years.

"These two events… tell us that regulators are becoming increasingly active in regard to cross-border trading, which is something, I believe, is long overdue; and a trend that will only strengthen in the coming year (protecting retail investors is also on ESMA's 2023 annual work program)," Kirketerp-Møller said.

However, Europe's overall FX/CFDs brokerage industry licensing regime has remained the same in 2022.

"The licensing regime under MiFID II did not change in 2022, and the framework for the authorization and licensing of investment firms in the European Economic Area remained more or less the same," MAP Fintech's Markides said.

Check out the recent London Summit session on "Regulation Roundup: Everything You Need to Know for 2023."

Offshore Brokers Are Still Operating, Illegally

The restriction of ESMA rules around leverage and marketing in 2017 and similar moves by other global regulators have opened an opportunity for offshore brokers. These brokers offer high leverage and lure customers with marketing tactics like deposit bonuses, which are illegal in jurisdictions, like the EU and Australia.

"Firms operating offshore, i.e., having their base of operations outside the EEA and actively soliciting clients from and/or offering/promoting services to the EEA (or the UK, USA, Japan, etc.) without the appropriate licensing, are doing so illegally," Markides said.

Though stopping such brokers is challenging for regulators, some regulatory action and pressure have been applied through detailed inquiries by a number of offshore regulators.

"The issues around payment processing and google advertising remain the same and continue to exert pressure on brokers who do not have a top-tier regulatory presence," Gerber added.

But, according to Kirketerp-Møller, "what we need is not more laws, but more enforcement."

What to Expect in 2023 in Terms of Regulation?

2023 is less than a couple of weeks away, and there is already buzz for new regulations. Though these regulations might be directly for cryptocurrencies, they will also influence retail brokers.

"2023 will probably see the EU voting in the much-anticipated MiCA (Markets in Crypto Assets Regulation) in an attempt to regulate the crypto industry and avoid future incidences like that of FTX where it seems the primary problem was the utter lack of business conduct rules," said Markides.

"We expect the new framework will ringfence the financial system (which includes CFD brokers), and no broker or investment firm will be allowed to offer crypto-currency or services related to cryptos, i.e., no firm will be allowed to simultaneously act as a MiFID Investment Firm and a MiCA Crypto Asset Service Provider. The two regimes will operate independently from each other."

"For the financial system (which includes CFD brokers), we don't expect many and/or substantial changes to the existing framework other than some minor tweaks to the MiFID II, such as the EU finally agreeing to abolish the requirement to publish RTS 27 reports."

Further, the regulators might focus on consolidating the existing financial services rules next year. Though there might not be any majo regulatory reform lineup for next year, bolstering supervision might be a key issue across Europe. The ESMA's attention on the CySEC might encourage the island's regulator to tighten its supervisory role even further, meaning there might be more enforcement actions and penalties.

"In terms of currently regulated markets, I think the trend right now is definitely... bolstering supervision, as demonstrated in the actions of the AFM, AMF, FCA, and ESMA this year in regard to cross-border trading," said Kirketerp-Møller.

"As for new markets, like Crypto, of course, MiCA will set the tone next year, as well as DORA, which is the Digital Operational Resilience Act. Both are in different stages of approval, but will definitely be central to the regulatory discussion next year."

Also, the ongoing public consultation of ESMA on new rules around financial services license passporting is hinting at more upcoming regulations around the area. Though the rules will not bring some significant changes, the European regulator's requirement for specific details by companies at the passporting stage might bring more regulatory challenges for brokers.