The April 4 meeting between the CySEC Chair Demetra Kalogerou and a consortium of brokerage company executives marked a potential turning point for the retail Forex industry in Cypus, spurred by a flurry of client complaints demanding stronger regulation.
Under a pretext that the meeting was to address “the latest and future developments of the Forex and binary options industries in the European Union,” what was meant to be a routine gathering took an unexpected twist as the Cypriot regulatory authority delivered a stark warning to industry leaders.
The CySEC chair addressed several sensitive aspects of brokerages’ business operations, including inadequacies in client onboarding processes, product ranges and sales and marketing practices.
A key focus was the usage of Introducing Brokers (IBs), as just 10 Cyprus Investment Firms (CIFs) are said to be holding 50% of all the complaints, most of them where IBs and rep officers are being used.
Authorities noted that upon reviewing supervisory action plans, IBs were giving investment advice instead of referring customers. “They sit with their clients, they give unauthorized advice and misleading information and there is no control over them or affiliates,” Ms. Kalogerou noted. “This must stop immediately.”
She further explained that the legal framework for IBs will be published in due time by the Cypriot regulator and the European Securities and Markets Authority (ESMA).
“Expect to begin implementing it. Do not wait for CySec to get the circular out. Be proactive,” she advised. “This also applies to tied agents and branches in certain jurisdictions. If you have an unresolved client complaint against you in the jurisdictions where you apply to have a tied agent, CySec will not allow that to go ahead unless all complaints are resolved properly.”
In terms of product suitability, she expressed strong concerns that inappropriate products are being offered to retail clients who are unable to understand the true risks of the products being offered. “For example, in 2016, 90% of binary clients lost their money. 70-80% are losing money on FX. These percentages are too high. These should be brought down,” she said.
As far as brokerages’ aggressive marketing campaigns, she noted that “10 out of 27 regulators are already taking measures against retail electronic trading in that these products are not appropriate for retail investors.” She also suggested brokers had a period of nine months to reassess their approach and urged attendees to adhere to a program of responsibility.
Another major change includes the ban of all unregulated call centers and additional education for brokerage employees without respect to their location, including required CySec exams. Ms. Kalogerou also indicated that cold calling practices must be terminated immediately and replaced by other methods of marketing.
The meeting also revealed the prohibition of all types of bonuses as well as the potential prohibition of binary options products. “We have to change the characteristics to bring in better transparency and execution,” she said.
Leveraged products, however, remain up for debate. “We expect to adopt another formula, but for now we limit it to 1:50 and this should ensure that the default leverage cannot be changed unless the client has specified appropriateness for higher leverage,” Ms. Kalogerou said.
The new legislation, MiFID II, which will take effect in January 2018 and will include a revised Markets in Financial Instruments Directive (MiFID) and new Markets in Financial Instruments Regulation (MiFIR), is expected to empower the ESMA to ban products altogether within the European Union.
“This is a warning, and I will close down problematic companies which have many complaints,” the CySEC chair warned.
Experts are noting that this is the first time that the Cypriot regulator delivered a message of such magnitude, while paving the way for a set of fundamental changes that will materially impact the Cypriot retail Forex industry.