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Screenshot of a breaking news alert e-mail from Q2 2017
One month on from the issuance of a consultation paper on trading bonuses by Cypriot financial markets regulator CySec, a decision has been reached with regard to the oversight of such trading benefits and bonuses issued to clients by retail FX firms.
CySec has now produced a comprehensive ruling on the method by which trading bonuses must be issued to clients by brokerages operating under its jurisdiction, largely focusing on the profits and losses generated using trading benefits, about which the CySec regulated firm must fully inform the client about the applicable treatment/allocation of these profits/losses, before the granting of the trading benefit.
Brokerages in Cyprus must establish and implement arrangements that enable the compliance with the ruling, and in case a Cyprus Investment Firm (CIF) cannot distinguish the profits/losses generated using clients’ funds and using a trading benefit, then the CIF must allocate all profits/losses generated using both (clients’ funds and trading benefit) to the client.
It has been observed by CySec that clients are not aware, at all times, on their funds that are available for withdrawal because these are not segregated from the trading benefits that cannot be withdrawn.
The ruling states that brokers must establish and implement arrangement that enable clients to be aware, at all times, on their funds that are available for withdrawal.
With regard to CySec’s observation that high charges are often set in the event of a funds withdrawal by a client, the regulator has stipulated that a broker must inform its clients fully and in advance for the charges applied for funds withdrawal. It is provided that charges must be reasonable, proportionate and in accordance with the regular commercial charges applied by credit institutions.
Ambiguity is a matter which has been addressed by CySec, with the new rulings on trading bonuses stating that prior to the granting of a trading benefit, a broker must explain to the client, in a clear and understandable way, the trading benefit conditions, using, inter alia, simple examples, so that the client is able to make investment decisions based on accurate and adequate information.
Emphasis should be given to the fact whether the trading benefit and the profits generated using the trading benefit may be withdrawn, or not, upon the fulfillment of the conditions.
All brokers must grant a trading benefit only to those clients who have passed the ‘suitability test’ or the ‘appropriateness test’ (where applicable) as it is provided under article 36(1)(c) and (d) of the Law.
In addition, the CIF must obtain client’s consent/acceptance, either in written form or in other equivalent mean, before granting a trading benefit.
It is noted that the acceptance by default of a trading benefit cannot be considered as equivalent mean of client’s consent/acceptance.
Where a trading benefit is granted under conditions and in particular, when it is linked with the trading volume generated by the client, it has been observed that the time frame set for fulfilling the trading benefit conditions is too short, which makes it impossible to achieve these.
Therefore, there is pressure/incentive to clients to conduct a large number of transactions in a short period of time in order to fulfill the trading benefit conditions. In case of setting a time frame, this must not act as a ‘pressure measure’ but must be reasonable under each situation circumstances and commensurate with the capability to fulfill the trading benefit conditions.
In order to gain industry perspective on these measures, LeapRate spoke to IronFX, a prominent FX firm in Cyprus. The firm made a commercial statement as follows:
“We anticipated this circular to be issued by CySEC, as it is very common for brokers to offer various forms of trading benefit. Whilst the regulator has now set some minimum requirements to which brokers must be compliant, this will not affect any of the trading bonus promotions offered by the Company.”
“We are not aware of which brokerage firms will be affected, but we are sure that any such brokers will make the necessary changes, where applicable, to meet the requirements set by CySEC.
“We view the proposed changes as positive in clarifying the subject of bonuses, and such extra regulations are in line with our expectations. There will be no real change in the way we conduct business, as we are already compliant.”
According to Advocate Tal Itzhak Ron of law firm Tal Ron, Drihem and Co., who assists many brokers and service providers to set up in the industry, many of these guidelines are a welcome addition, and many Cypriot-regulated and even other international regulated and non-regulated entities already adhere to these guidelines.
Advocate Tal Ron believes that it is very handy and helpful that CySec presents those guidelines in such a convenient way and at the same place. However, many of those guidelines are still a bit vague. What is a “reasonable” time, and what is not? Advocate Tal Ron agrees that it is vital that clients are not granted bonuses that have unrealistic conditions to exercise, or given to non-qualified or non-competent players.
Most importantly, Advocate Tal Ron explained that the withdrawal times should be realistic. Withdrawal times should be always clearly stated and implemented, while the ongoing competition between brokers and the daily introduction of new websites may lead to better terms to clients and an overall improvement in the industry.
For the official announcement from CySec, click here.
Photograph: Advocate Tal Itzhak Ron, Chairman, Tal Ron, Drihem & Co.