IBs and Affiliates: In-Depth Look into the German Market 2005-2015

This week our guest blogger Sebastian Hell reflects about the German reality for IBs and Affiliates. Kindly leave your comment

Written by Sebastian Hell

sebastian hellSebastian Hell is CEO and owner of BaFin regulated QTrade GmbH in Munich. QTrade is one of Germany’s biggest Introducing Brokers offering CFDs, FX and physical gold investments.

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2005 was the time when CFD and FX trading started to evolve in Germany.
During this year, German financial markets regulator BaFin changed its mind and dropped the regulation for IBs. This was in the good old days when deregulation was the name of the game.

If you take a closer look at research from this time (the years 2007 to 2009 which have been closely analyzed by German university “Steinbeis”) you can see growth rates of 100 per cent or more for deposits, transactions, active traders and so on. Later on the growth rates slowed down as the market matured. During those days, many brokers made good money because spreads were 3 pips wide or more for EUR/USD and many affiliates and IBs started to target German clients.

 

2011 Marked a Change …

In May 2011, the IB business changed in Germany dramatically. BaFin published a notice  which said, that from now on IBs and affiliates were not allowed to introduce clients without a proper regulation. Indeed, there was no change in the law, but a change in interpreting the law by BaFin.

To go more into detail, there was always a regulation required if you wanted a client to make a direct financial transaction. But, introducing a client to a broker was one step behind that, because with this action only business introducing was involved and following financial transactions (buying and selling assets) were seen as another story.

But with its new interpretation, BaFin stated that introducing a client to a market maker as direct counterparty was like making the client do a direct financial transaction and therefore a regulation is required.

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IBs either needed to stop their operations or get regulated (which is very expensive in Germany and time-consuming) or look for a liability umbrella and become a tied agent. Most affiliates and IB stopped working, some of them did not care about the new regulations and a small number became regulated or tied agents.

The ones that did not care about the laws usually became IBs or affiliates for either unregulated offshore brokers or lesser regulated brokers. Most FSA (now FCA) brokers did not accept German IBs without regulation anymore.

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2013 Brought a New Change Again…

In 2013 BaFin deregulated again and dropped their old notice from 2011. But they never published any notice about this. I only know from some lawyers that internally BaFin agreed that a regulation or liability umbrella is not necessary when someone only sends clients to a broker (market maker).

To be sure if you need a license or liability umbrella, it is good advice to consult a lawyer because at the moment no one can be sure what BaFin will do next. My personal opinion is that in the not too distant future BaFin could ban all IBs and affiliates that are not licensed. That is why my partners and I took the step to get our own regulation.

What Is Going on Now?

At the moment, the German market is targeted by more than 40 brokers, a fact I mentioned in my article about the local market. There are only a handful of big IBs left like QTrade, FXFlat, Brokerdeal and Ayondo (which is now part of Ayondo Markets and not an IB anymore). These firms are big enough to hire specialists and lawyers as well as compliance people to fulfill all necessary obligations.

Most website owners chose to work as affiliate and get money for every demo or live account they refer to a broker. Many websites also decided to focus on advertisements like banners, newsletters and so on, not to have problems with BaFin.

To sum it up, the big brokers try to get clients in Germany directly. There are not many IBs left. Most affiliates are small and bring in only a couple of clients. There is also a trend that many affiliates now focus on binary options brokers, because they pay more and don’t care very much about compliance like FCA or BaFin regulated brokers do.

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