The forex industry as we know it is a product of technical revolution. It was the proliferation of home computers and the internet boom that allowed retail investors to start trading currencies on their own terms.
The decentralised online forex marketplace has truly democratised trading, allowing people from all over the world, from any background, to buy and sell currency pairs in the hope of making a profit from minute changes in exchange rates.
What was once the sole preserve of large financial institutions is now available to anyone with a reliable internet connection.
More recently, the shift towards mobile trading has enabled even greater accessibility. Traders don’t have to rely on their desktop or laptop computer any longer – or even need to stay within clicking distance of them.
Paired with the rise of more affordable smartphones, mobile trading apps like FXTM Trader go a long way towards breaking down the remaining logistical barriers to currency trading.
The flipside of greater accessibility, however, is a more pressing need to ensure that this new client base is fully aware of the risks inherent in online trading.
The cost of compliance
A major turning point for the forex industry is the increasing oversight demanded by regulatory bodies.
These exist to protect consumers and ensure they are accessing a service that’s transparent about the risks involved in forex trading and that their personal information is protected to the fullest extent.
Regulation also ensures that brokers protect themselves from bad actors, whose strict Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures aim to weed out.
Many brokers’ capacity for regulatory change was tested in 2018. Still dealing with fallout from the 2008 financial crisis – not least the need to restore trust in the financial services sector – regulatory bodies in Europe and beyond responded to consumer concerns about misleading communication with a raft of restrictions and legislation.
The Markets in Financial Instruments Directive II came into effect in January 2018 across the European Union. MiFID II introduced a robust framework designed to increase transparency in the industry, especially surrounding price and volume information.
The European Securities and Markets Authority (ESMA) has required brokers to impose trading restrictions and limitations on who can trade certain instruments, for example CFDs (contracts for difference).
In order to help protect traders (especially less experienced retail traders) from rapid losses, leverage limits have been implemented. At the end of 2018, ESMA announced that further regulatory revisions would be introduced in 2019.
These changes, combined with the introduction of GDPR for data privacy and stricter requirements regarding AML and KYC, posed a challenge to brokers’ compliance procedures. As regulatory bodies continue to refine their responses to technological developments, forex brokers must find a way to be continually adaptive if they hope to scale up their services.
In an environment that’s becoming ever more fast-paced, brokers who aren’t taking the fullest advantage of the efficiencies allowed by technology are likely to get left behind.
This is where regtech (regulatory technology) comes in. Regtech tools allow brokers to remain agile in the face of change, by automating some key functions and allowing departments to increase their output without simply replicating time and labour-intensive manual checks.
That’s the reg – what’s the tech?
In short, regtech revolves around using cloud computing, machine learning, biometric information, big data and artificial intelligence to process a greater set of information more efficiently and accurately.
Electronic identity verification helps confirm that prospective clients are who they say they are, in compliance with anti-fraud KYC and AML policies. Big data and machine learning speed up and refine this process, while using biometric data increases the accuracy of identity verification.
Artificial intelligence allows brokers to identify and spot patterns in trading behaviour, allowing for earlier detection of possible suspicious activity.
As well as being expensive (and in some cases impossible) to replicate at the scale that increased accessibility demands, these processes are also subject to human error when done manually.
What’s more, as well as regtech tools typically returning results in seconds, they also leave an automatic trial behind them, satisfying another important compliance function in real-time.
The demand for technological solutions is clearly there. As an industry, regtech’s revenue in 2018 was estimated to be as much as $2,321.5 million according to market research firm Analytical Research Cognizance, and this figure is only set to grow; it’s projected to be $7,2907.6 million by 2023.
This represents a huge amount of investment from the fintech sector, as fast-moving companies scramble to ensure that their compliance procedures can keep up with the pace of change.
Reputable forex brokers like FXTM embrace the security that regulatory requirements offer their clients. Financial penalties for non-compliance and loss of trust from clients mean that the stakes of falling behind regulatory changes are high.
Investing in robust regtech tools will become increasingly important as the forex industry continues to adapt to and drive new technological advances.
Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.
Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 90% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The FXTM brand provides international brokerage services and gives access to the global currency markets, offering trading in forex, precious metals, Share CFDs, and CFDs on Commodity Futures. Trading is available via the MT4 and MT5 platforms with spreads starting from just 1.3 on Standard trading accounts and from 0.1 on ECN trading accounts. Trading on the MT5 platform is not available for Forextime UK Limited. Bespoke trading support and services are provided based on each client’s needs and ambitions – from novices, to experienced traders and institutional investors. ForexTime Limited is regulated by the Cyprus Securities and Exchange Commission (CySEC), with licence number 185/12 and licensed by the Financial Services Conduct Authority (FSCA) of South Africa, with FSP number 46614. Forextime UK Limited is authorised and regulated by the Financial Conduct Authority, firm reference number 777911. FT Global Limited is regulated by the International Financial Services Commission (IFSC) with license numbers IFSC/60/345/TS and IFSC/60/345/APM.