Shooting Yourself in the Foot: The Cypriot Edition


Share

Continuing to bring our readers different viewpoints of industry experts on the CySEC bonus ban, we present today’s guest post courtesy of Konstantin Rabin, CEO at eFXto.

Would you like to have your say on the issue? Do you have an idea for a guest post on a different topic? Want your article to be viewed by the hundreds of thousands of viewers who regularly visit LeapRate and receive our daily email newsletter?  Let us know at guestposts@leaprate.com.


Konstantin Rabin, eFXto.com
Konstantin Rabin, eFXto.com

While some people may assume that the most recent update from CySEC is horrifying, I actually feel that it is deadly. Not for the brokers though, but for CySEC itself. Let’s quickly go through an updated version of ESMA’s Q&A document, section i, and discuss the main phrases and comment on them.

CIFs must avoid the practice of offering bonuses

Isn’t it just a direct interference in the business? Prohibiting trading bonuses is like saying that you cannot promote your business. Yes, a certain promotion (of any company) is designed to make people buy from you. You is the key word here. It is unlikely that a person will buy an expensive item that he doesn’t need at all just because it was on sale. Well, here is the reasoning that CySEC supplies:

as it is unlikely that a firm offering such bonuses could demonstrate that it is acting honestly, fairly and professionally and in the best interests of its retail clients

This is my favorite part. So offering bonuses means not acting in the best interests of a client. Know what else means that a broker does not act in the best interests of its retail clients? A market maker’s license. If CySEC so much wants to actually make brokers act professionally and in the client’s best interest, why wouldn’t it demand the brokers to put all of the orders on clearing? Sounds way more effective. Guess that’s not what CySEC wants.

On the flipside, what makes a company that offers bonuses act dishonestly, unfairly, and unprofessionally? There are quite a few financial organisations that run promotions. Many lenders would give you the first loan interest-free. Banks often kick back the commission, provide various gifts for opening accounts or making deposits. Seems like CySEC only has a problem with Forex, CFDs and binaries.

CIFs will not launch any new bonus schemes to retail clients from now and onwards and let the existing ones lapse or expire or in any way cease to exist

There is nothing special here. Still, it is not quite clear. What if a broker has a promo that ends in two years from now? Does not seem like a fair competition to me.

CIFs must be able to demonstrate to CySEC that such trading benefit is not designed to encourage behaviors that are not in the best interests of clients

Does CySEC know how Forex bonuses work? Let’s take a typical deposit bonus as an example. A trader deposits $1000. After completing, say, 40 lots a client receives $200 of bonus money. Is it in the trader’s best interest to trade? Yes. Is it in the trader’s best interest to get a chunk of his spread back? Yes.

Alright, now let’s take a look at why such practices are actually worse for CySEC than for the brokers.

FCA becomes a more viable option

For years CySEC regulation was a broker’s preference. Traders have always valued FCA more. Now CySEC tightens the screws and it does seem that none of the newcomers in FX (might be different for binaries) will choose CySEC over FCA.

Many brokers just won’t stop

So what will happen to a broker that gives bonuses? For years CySEC has not been able to not demonstrate that it can deal with malpractices and scams effectively. Of course, it has given some fines, but nothing extraordinary. If a broker wants to treat clients badly, it will. And now CySEC has got an additional practice to oversee.

Deregulation

Perhaps bonuses will not be the main reason, yet the whole attitude of CySEC may actually be the catalyst behind brokers going for deregulation. As a result, we will have CySEC-regulated companies with tied hands that are trying to fight unregulated brokers that offer an extra bang for a trader’s buck.

The final thought

What CySEC has done is clearly a lose-lose situation for itself and FX / binary companies. The prohibition on bonuses will not harm many brokers and its impact will be rather fractional. However, this way CySEC shows that it plans to keep the brokers on a short leash. This will lead to a dramatic decrease in the number of CySEC license applications and will lead to quite a few CySEC brokers either going for another regulation or dropping the regulation at all.

Will this have any positive impact on the traders? I hardly doubt it. Traders will no longer be able to receive extra benefits, some of which (like no deposit bonuses) were quite useful for beginners.

Finally, many examples throughout history have shown us that prohibition can never be good as it creates an underground market for services. Raising awareness about the risks and demanding that brokers educate clients might have been a better response, yet it seems that CySEC goes in a completely opposite direction.

Related News

  • Lex

    + to CySEC.
    – to Konstantin.

    Because in general bonuses gives more reasons for traders to make lots, not a stable trading. That`s why and also because there is a lot of cheat schemes of bonuses summary bonus offers lead trader to losses, not helping them at all.

    • Konstantin Rabin

      One important thing. Even if a trader enrols in a certain promotion, it does not mean he is obliged to meet the requirements.

      Consider 2 cases:

      1) A trader deposits $1000. He gets no extras.
      2) A trader deposits $1000. He gets a chance to get a $200 bonus.

      Which one is in the trader’s best interest?

      It would certainly be a better idea to provide a regulatory framework around the promotions (e.g. 10% max, $10 of bonus per lot min etc) than just banning them.

      • 3) A trader deposits $1,000 and receives option to increase leverage that would be equivalent to $200 extra buying power. Or receive a discount in commissions = $200. Or $200 credit towards a bonafide VPS provider.

        No trickiness, and the [professional] broker can actually focus their attention on best execution practices, instead of canceling bonus or profits based on some technicality.

        The latest ESMA Q and A has an entire section 6 dedicated to why they frown on trader benefits (bonuses) to encourage retail client speculation.

  • James R

    The view offered by @konstantinrabin:disqus is a general Libertarian view of the world, that people are generally better off when the government leaves them alone and meddles in their lives as little as possible. Regulation we all understand is necessary, but regulators should if at all possible avoid things like total bans on things, mainly because they usually backfire or have the exact opposite effect of what was intended. Issues like rent control or alcohol prohibition are good examples.

    You don’t have to agree with his view of the world, or of Cysec’s ban in this case, but it certainly is a legitimate point of view.

  • Compliance

    @Konstantin Rabin there are factual inconsistencies and opinions made that you should consider addressing:

    1. “CIFs must avoid the practice of offering bonuses”

    It is the regulator’s core mandate (in this case CySEC) to interfere in how regulated entities to whom they have issued licences to offer investment and ancillary services to, irrespective of whether you are for or against this.

    As for acting fairly when issuing bonuses, I strongly recommend you read Circular C065 issued by CySEC. There it was clearly stipulated that CySEC had noted “No explanation, or insufficient explanation of the conditions of a trading benefit granted to a client in a clear and understandable way”. So, to put it in simple terms, CySEC had requested companies clearly demonstrate this. As they have not, or at least not enough participants offering bonuses have not, it appears as though they took the next level of action in accordance with ESMA’s Q&As.

    As for your comment on banks and CySEC only showing interest in Forex/Binary companies there is a very good reason for this; they don’t regulate banks in Cyprus, the Central Bank of Cyprus does.

    2.“CIFs will not launch any new bonus schemes to retail clients from now and onwards and let the existing ones lapse or expire or in any way cease to exist”

    Again, factual inconsistencies with what you mentioned under this point. Firms have until December 14, 2016, to report any current promotions and are expected to “not launch any new bonus schemes to retail clients from now onwards and let the existing ones lapse or expire or in any way cease to exist.”

    3. Synopsis?
    Do your homework better next time and understand that this will filter the trash by January 30, 2017.

    • Konstantin Rabin

      1. “As they have not, or at least not enough participants offering bonuses have not, it appears as though they took the next level of action in accordance with ESMA’s Q&As.”

      A job of a regulator is to re-gu-la-te. Not ban. Banning is the easiest and least effective solution. The current practice simply shows that CySEC cannot do its job well and chooses a shortcut.

      2. “Firms have until December 14, 2016, to report any current promotions and are expected”

      Probably I didn’t express it right. My question here is: What will happen to a company that stated in its terms that the bonus ends on 01.01.2019? There is no defined date by which all of the bonuses should stop.

      3. “This will filter the trash by January 30, 2017”
      Tell me any previous action of CySEC that filtered the trash, and then I will believe it 🙂 I can name over a dozen of companies that are trash, don’t offer any bonuses, provide signals and other shady stuff…and they never had an issue with CySEC.

      • Compliance

        1. “A job of a regulator is to re-gu-la-te. Not ban.”

        Again, do your homework. They have not banned. They state that any future trading incentives must be sent to CySEC for approval and demonstrate that they are in the interest of clients and “fair”.

        2. “Probably I didn’t express it right. My question here is: What will happen to a company that stated in its terms that the bonus ends on 01.01.2019? There is no defined date by which all of the bonuses should stop.”

        No. You probably didn’t read my initial comment. CySEC will allow existing promotions to expire.

        3. “I can name over a dozen of companies that are trash, don’t offer any bonuses, provide signals and other shady stuff…and they never had an issue with CySEC.”

        So a broker who does not offer a bonus is “trash”? I suggest you stop looking at your personal interest (i.e. marketing and revenue wise for your website) and claiming that bonuses are a requirement for traders.

        Word of advice. Stop shooting yourself in the foot.

        • Konstantin Rabin

          1. Wouldn’t it be more effective to actually develop a regulatory framework around the bonuses?

          2. So a broker that launched a bonus promotion today that ends in 2050, can, hypothetically, run bonuses until the end of the retail Forex. Correct?

          3. I am not saying that bonuses are a requirement for a trader. In fact, I am sure that for the vast majority they are not. I am also not saying that brokers without bonuses are trash. What I am saying is that CySEC has a way bigger fish to fry.

          Also, I am sure I will be fine with or without bonuses. I just don’t expect any sane broker to go for the CySEC license.

          • Compliance

            1. “Wouldn’t it be more effective to actually develop a regulatory framework around the bonuses?”

            Because repeating myself is getting boring, let’s try and clarify this matter one last time. They tried establishing a regulatory framework and it was either not functioning, or not functioning well enough. You see, Law 144 section 36 discusses financial promotions. Circular C065 elaborated on this. ESMA and their Q&A went a step further and CySEC implemented this with Circular C168.

            In brief: there is a regulatory framework. It’s what your post is commenting on.

            2. “So a broker that launched a bonus promotion today that ends in 2050,
            can, hypothetically, run bonuses until the end of the retail Forex.
            Correct?”

            No. It states “existing” not new. If CySEC decides to then set a deadline in the future (which may be the case) shall be seen. Until then, “existing” promotions prior to the release of Circular C168 may continue until maturity or unless the broker chooses to end it.

            3. “I am not saying that bonuses are a requirement for a trader. In fact,
            I am sure that for the vast majority they are not. I am also not saying
            that brokers without bonuses are trash. What I am saying is that CySEC
            has a way bigger fish to fry.”

            They are frying the sea, not just the big fish, and starting by the biggest revenue generating source for firms to attract clients.

  • kypselian

    hi you are all wrong. This not the real reason bonuses were prohibited, not because they make you trade more and you lose etc….
    Bonuses made a mess in the market. The main reason Ironfx had all these issues are because of bonuses. Everyday CySEC is receiveing hundreds of complaints from clients due to bonuses (I cannot withdraw, they cancelled my profit, they told me I hedge externally etc…).

    By prohibiting bonuses, all these complaints will stop. It is called cleaning the market

  • KimF

    The problem stems from the Israeli and Russian brokers being recalcitrant. I’m happy CYSEC have done this. The next step is a total ban on the use of client money for hedging. I cant wait to see the day when there are no Israeli and Russian brokers on this planet, it will be a safer place for all traders globally and good for the industry as a whole.

  • LoL. Little does the OP realize is that Cyprus was taking ques from recent ESMA Q&A clarifications, which regulate financial markets across EU countries. So really the title of the article should read: Shooting yourself in the foot, EU edition.
    Brokers are supposed to be focused on providing honest/fair/professional execution in the best interest of their clients and not trade against them. Not creating conditions that make them confiscate bonus, profits, or even deposits over a technicality.

    The over whelming majority of brokers who even offer so-called deposit bonuses were dishonest MMs. The only ‘bonus’ if you want to call it that professional broker would offer are volume discount. So if the client makes a specific volume requirement, they are eligible for a commission discount. Not to be confused with rebate.

    Binary options are a separate class of scam altogether.

    CySec is to be commended for at least taking a step. The enforcement is to be seen. But if a broker doesn’t stop being in violation of the rules, CySec can just revoke their CIF license.

    The other rules like initially capping leverage at 1:50, same day withdraw timescale, best execution obligations, etc are not just to comply with ESMA directives, but they are also in the clients best interest.

  • The real BoB

    I think the author has incorrectly interpreted what the edict means. FOr traders and brokerages not involved in ‘bonus’ traders this is great, as it is a return hopefully to the real FX market.

    As noted by Awareness Forex, if the service provider concentrates on offering improved execution rather than a new bonus to bring in mew meat, then it can only be a positive for the market.

    If you are worried that brokerages will still offer bonuses will go off shore, then you fail to take into account that they wil be restricted on using certain PSP’s by not being regulated.

    I would be happy to be proved otherwise…

arrow

Shooting Yourself in the Foot: The Cypriot Edition

Share this

Send this to friend

Signup for LeapRate's Email Newsletter
Interested In Forex Industry News & Information?

Subscribe FREE To Our Industry Leading Email Newsletter:

  • Trading Industry News To Your Inbox
  • Breaking News Briefs
  • Executive Moves
  • Broker, Platform and Vendor Updates
  • Financial Results
  • FX Volume Reports
  • Exclusive Commentary
PGlmcmFtZSBzcmM9Ii93cC1jb250ZW50L2E0bHIvaGFuMTZyZXNfNjI1eDQwMC5odG1sIiB3aWR0aD0iNjI1IiBoZWlnaHQ9IjQwMCIgZnJhbWVib3JkZXI9IjAiIHN0eWxlPSJib3JkZXI6bm9uZTsiIHNlYW1sZXNzPjwvaWZyYW1lPg==
PElGUkFNRSBTUkM9Imh0dHBzOi8vYWQuZG91YmxlY2xpY2submV0L2RkbS9hZGkvTjgwMTcuMTkxNDQzMkxFQVBSQVRFL0IxMDY0ODE4OS4xNDIxOTAzNjE7c3o9NjAweDQyNTtvcmQ9W3RpbWVzdGFtcF07ZGNfbGF0PTtkY19yZGlkPTt0YWdfZm9yX2NoaWxkX2RpcmVjdGVkX3RyZWF0bWVudD0/IiBXSURUSD02MDAgSEVJR0hUPTQyNSBNQVJHSU5XSURUSD0wIE1BUkdJTkhFSUdIVD0wIEhTUEFDRT0wIFZTUEFDRT0wIEZSQU1FQk9SREVSPTAgU0NST0xMSU5HPW5vIEJPUkRFUkNPTE9SPScjMDAwMDAwJz4=



SEND MORE INFORMATION ON PLACING A LISTING IN THE FOREX YELLOW PAGES

I'M INTERESTED IN ADDING A COMPANY
PGlmcmFtZSBzcmM9Ii9hNGxyMTcvcG9wdXAtZGVza3RvcC02MDB4NDI1Lmh0bWwiIGZyYW1lYm9yZGVyPSIwIiB3aWR0aD0iNjAwIiBoZWlnaHQ9NDI1IiBzdHlsZT0iYm9yZGVyOm5vbmU7Ij48L2lmcmFtZT4=