Is new licensing regime for forex lipstick on a frog?
Forex trading’s reputation in SA has been plagued by story after story of con artists and scams. We have seen men with colourful names (I’m looking at you, “Cashflow”) prosecuted by the Financial Services Conduct Authority (FSCA) and convicted of defrauding their clients, and others (the “FBK Millionaires”) accused of operating illegally.
It seems as if every few weeks another so-called forex scam is revealed.
I say so-called because while some people are certainly running scams, what they are doing has little to do with forex trading. Most of the scams are pyramid schemes, or the closely related Ponzi scheme, and forex trading is just a disguise used to cover the crime. The criminal operators often know enough to sound knowledgeable, but they are not financial geniuses or they wouldn’t be scamming people in the first place.
The real problems with forex trading in SA lie in two related areas: a lack of education among new forex traders and the bad forex brokers who take advantage of this ignorance.
So, what is the FSCA doing to put these brokers out of business and assist new traders? After a decade-long process, it is about to launch a new regulatory regime, which may be the solution.
The new regime, known as the Over the Counter Derivative Provider (ODP) licence, requires brokers to conduct due diligence on all clients before they can trade high-risk products, introduces stricter capital adequacy requirements and requires brokers to provide the FSCA with continuous access to all transaction data. This last requirement is designed to ensure brokers treat traders fairly and do not engage in dishonest or illegal activity.
The more people read about forex scams, and the more people fall victim to unscrupulous brokers, the more the reputation of the industry suffers.
So far, the new regime is being met with cautious optimism by the local industry. Jimmy Moyaha, an independent consultant in the financial markets space, is clear that change is much needed.
“With this new regime it’s a real chance to clean up our industry — the local industry has gone through a difficult time recently, we have seen a lot of forex scams and it is very difficult for legitimate providers to conduct business in an environment where consumers are regularly getting scammed,” he says.
Having interviewed several local forex brokers, this is a recurring theme — that scams and bad brokers are damaging the industry. The more people read about forex scams, and the more people fall victim to unscrupulous brokers, the more the reputation of the industry suffers. And this is something legitimate brokers want to be put right as soon as possible.
As Moyaha points out: “We have a real opportunity here with the ODP licence to sweep out all of the junk that’s in the local industry and create a cleaner market. That’s why the ODP licence has been created, I believe — to clean out the bad apples and start again.”
Other brokers we talked to were less sure that the ODP licence is a good thing for the industry, not because new regulation isn’t needed, but because the new regulation is not built for the SA market and will be unenforceable.
One FSCA-regulated, award-winning brokerage would only speak to us on condition of anonymity. One of their concerns was that the FSCA had not engaged fully with the local industry before deciding on the new regulatory regime.
“Frankly, in our industry, the cost of compliance is very low — there is an incentive for business to try to circumvent whatever legislation has been put in place. So, anything apart from full engagement [with the forex broking industry] will end in a situation where the FSCA and the market players will be diametrically opposed, which will not end well for anyone,” the broker said.
“What are the advantages of this new regime? Because I don’t see much. I wish [the FSCA] had gone further, in terms of the suitability requirements for traders and the integration of trading records between market players.”
As it stands, the ODP licensing regime is still in the application phase, so it remains to be seen exactly what final form it will take. The FSCA is certainly planning a more transparent and better-regulated market, but the concern is that the new regime will be a redecoration rather than a complete overhaul, the broker said.
Another FSCA-regulated broker said: “We have been in business now for over four years and we have never had an on-site inspection from the FSCA in all that time. They rely on the audits sent to them by compliance officers, but these are completely desktop-based. And this honestly worries me.
“It’s an open secret, there are a few bad apples in the local market. But you are never going to get rid of them by relying on desktop audits. This is the kind of thing I have brought up with the FSCA, the importance of [on-site] inspections. If they start making inspections, they will … become better regulators.”
It seems how well the new regime protects traders will depend on how well enforced it is by the FSCA. Based on the FSCA’s strong regulation of traditional finance, there is a good chance it will succeed, but some are worried we might be looking at a change in the letter of the law without any change in reality.
• Cammack is with TradeForexSA. This is a shortened version of an article that appears on the company’s website.