ESMA Directive had already been welcomed in Cyprus; now Great Britain is about to adapt to it by proposing new rules to ensure appropriate protection of retail investors. Bonuses seem likely to disappear, while leverage will be strongly reduced.
A debate has now been going on for some time about the dangers related to unbridled Forex trading which is increasingly attracting inexperienced investors by promising huge, immediate, and easy money. Many have pointed the finger at leverage (a sort of magical expedient, able to multiply the money invested but, at the same time, to make lose it in a few seconds), as well as at bonuses, enticing promises that, however, do not compensate the losses of inexperienced customers.
Starting from ESMA
Last October the European Securities and Markets Authority (ESMA) had clearly requested the suspension of Forex retail bonuses (intended for retail investors) and binary options brokers. The elimination of such trading-related bonuses would likely reduce the number of inexperienced customers who are attracted by this kind of investments.
According to the European authority, bonuses would have a negative impact on investors' common sense; indeed, investors could be encouraged to invest more than they could or should. Furthermore, bonuses often involve burdensome obligations; this means that once the offer has been submitted, investors must trade amounts up to 30 times higher than the bonus; otherwise they won't cash the money invested.
In practice, bonus exposes investors to excessive and unnecessary risks, especially when it is linked to speculative products.
Cyprus and Great Britain are adapting to ESMA's rules
To adapt to ESMA's guidelines the Cyprus Securities and Exchange Commission (CySEC) has announced the upcoming introduction of a number of novelties related to Forex, binary options and CFD (Contracts For Difference: investors are requested to deposit a small percentage of the full value of the trade in order to open a position).
Promotional bonuses should be also banned for companies registered in Cyprus. As for leverage, CySEC has decided to set a margin equivalent to 1:50, unless investors specifically ask for higher leverage by submitting an "appropriateness test". This will determine whether they are suitable to trade with lower margin requirements.
Moreover, brokers are now obliged to process the customer's withdrawal request on the same day, provided that it is made within trading hours. CySEC has given its members until 30 January 2017 to adapt to the directive. After this deadline, CySEC and FCA – the British Financial Conduct Authority – will ban bonuses (both those related to trading activities and those associated with the opening of a new account). Leverage will reach a maximum of 1:50 ratio for the most experienced investors, while the limit will drop to 1:25 for customers with a trading experience < 12 months. Only the implementation of these two measures can protect the most vulnerable customers and the improvised traders.
Focusing on transparency, FCA intends to require the registered companies to publish their customers' profit-loss ratios in order to clarify trading risks.
FCA is also developing a new set of rules to regulate binary bets with the aim of promoting a better awareness on the risks posed by investments.
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