Regulation will not cause the death of the foreign exchange (forex) industry – brokers already caused the death of the asset five years ago. That statement was made by Ron Finberg, Business Development of Cappitech at the 2019 iFX expo in Cyprus while speaking on the Shoring up Operations: Trends in Regulation in 2019 panel.
In 2018, the FX industry in Europe was transformed thanks to regulators clamping down on bad practices and making investor protection their top priority. Since then, brokers have had to change the way they do business and invest more in their compliance department to ensure they stay up to date with regulation.
One of the biggest questions to arise from these changes is, will regulation be the death of the FX industry? According to Finberg, bad practices and poor marketing already caused the end of the FX industry five years ago. Now, brokers need more than offering FX for trading. They need other assets such as contracts-for-differences (CFDs), stocks, indices, etc.
Rod Martenstyn, the CEO & Founder of OSS Consult Ltd, agrees with this, stating that the regulations in the European Union (EU) didn’t come from nowhere, they were in response to the culture that many regulated firms in the FX and CFD sector had.
Instead of blaming regulators, Martenstyn believes that brokers should be using this opportunity for self-reflection and trying to improve the culture not only within their own company but within the industry as a whole.
“Regulatory interventions are the effect, and the cause – there’s been a historic culture issue with regulated firms in the CFD/FX sector, and there needs to be sometimes some self-introspection from the sector as to identifying their culture gaps and addressing their regulatory gaps as well,” Martenstyn said at the panel.
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“I don’t blame the regulators for the death of the industry; there need to be some honest words and some self-introspection of regulated firms,” he continued.
The Rise of Offshore Brokers
As a result of the tightening regulations in the EU, brokers are now looking offshore to try and onboard clients from geographies outside of Europe. However, in terms of offshore destinations, Martenstyn suggests there are two categories – reputable destinations such as Singapore and Australia, and the less so such as the British Isles, Seychelles, Bahamas, Marshall Islands, and Vanuatu.
Specifically, Martenstyn suggests that brokers setting up an offshore office in one of the latter locations only have a “short-term” view in mind and aren’t considering the fact that these places are labeled “high-risk” and can be difficult to set up a bank account in the United Kingdom and other areas.
Australia’s Safe Haven Status is Quickly Disappearing
Australia is also a popular offshore destination, and it also falls under the “reputable” category. In fact, Australia was at one point considered to be a safe haven as it offered brokers a place to set up an office in an established market with less restrictive regulation.
However, it seems that time may be coming to an end. As Finance Magnates reported, the Australian Securities and Investments Commission (ASIC) has clamped down on brokers onboarding clients outside of Australia, and more specifically China.
On this issue, Finberg highlighted: “One conspiracy theory, which I believe is a sound reasoning behind all of this – there is a tariff war going on between the US and China and Australia is sitting in the middle… So they say ‘OK fine’ if we make these changes and we say that we won’t have Chinese customers so easily in Australia, that may be a way to appease the Chinese government.”
Not only that, but rumors and fears continue to mount that the Aussie regulator is going to follow in the footsteps of the European Securities and Markets Authority (ESMA) and implement product intervention measures that will restrict leverage, amongst other changes. Martenstyn summed up this issue by saying, “it’s going to happen eventually.”