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Dr Omar Zerafa, Founder and Advocate at Zerafa Advocates, takes a detailed look at the viability of establishing retail FX firms in Malta, and how it compares to Cyprus as a hub for the FX industry.
The online financial trading industry is gradually moving towards a more regulated approach, seeking jurisdictions that traditionally were frowned upon because of rules and regulations which were considered onerous. Traders, who ultimately lead the industry, are being more cautious as to where they are putting their money and this has prompted operators to start looking at more reputable jurisdictions for licensing.
Malta is far from being a jurisdiction that accepts all kinds of operators. The Malta Financial Services Authority (MFSA) ensures that any applicant coming to Malta has the appropriate approach and sufficient resources to provide its services from a reputable jurisdiction and for this purpose it has recently issued a circular clarifying the licensing approach that the Authority will adopt with respect to applications for online financial trading platforms. The requirements range from having a regulated entity as one of the shareholders to using a trading platform with sufficient track record.
Great attention is given to the qualifications and experience of the Board of Directors and the senior officials of the company. These rules are not there to make licensing even more difficult but to attract online financial trading providers capable of operating within a highly regulated environment.
It is useless obtaining a licence in Malta and then not having the right mentality and approach to operate in terms of such a licence and this is where operators are having difficulties in more lenient jurisdictions. More importantly the rules aim to instil a culture of protection of clients’ assets, of transparency towards fees and trading methodologies and more importantly of eliminating licence holders that do not have any particular local presence commitments and substance.
Throughout the years, Cyprus has been an attractive jurisdiction to operators seeking to be licensed in the EU owing to a lenient system through which an operator can easily set-up an online forex trading operation and obtain an EU licence that can then be passported elsewhere.
There is the notion that once the licence is issued, the Authorities will not impose strict due diligence and compliance requirements which in turn makes onboarding clients and daily trading even quicker and accordingly more profitable. This is great news for the operator but unfortunately traders are also becoming aware that ease of doing business is not always tantamount to adequate protection for themselves and they are also being concerned by how other jurisdictions look at a Cypriot licence.
Recently, as also reported in LeapRate, France’s Autorité des Marchés Financiers (AMF) has discovered that there were certain shortcomings from firms regulated by CySEC in Cyprus when it comes to the collection of due diligence before opening a live trading account. There were also issues with appropriateness test forms to ensure that the client has sufficient experience and is well informed about the financial products such client is trading.
The AMF also reported certain instances where traders encountered difficulties and substantial delays when withdrawing their funds. Had any of these operators been licensed in Malta, these shortcomings would have been considered a breach of the rules and the MFSA would have taken action to either fine or suspend the licence of the operator, depending on the severity of the breach. Moreover, frequent compliance visits carried out by the MFSA and the Financial Intelligence Analysis Unit (FIAU) are meant to prevent such instances from happening in the first place.
In this sense, Malta’s reputation is growing at a steady pace. On the one hand, you have a very approachable regulator which is ready to listen to the promoters’ ideas and encourages a personal meeting with the promoter in order to get to know the latter and the background he is coming from and also to discuss the intended operation. This would give the promoter an opportunity to familiarise with the approach of the regulator towards its licence application and get a better feel of what the regulator would expect.
On the other hand, Malta is also emerging as a jurisdiction with very robust rules and regulations aimed at protecting the interests of the clients, particularly if they are retail clients as is mostly the case in online financial trading.
There are numerous disclosure requirements, appropriateness tests, measures to be taken when dealing with clients’ money, due diligence and verification of identity requirements and investor compensation scheme contribution requirements which are all aimed towards ensuring an enhanced level of protection towards the client.
Nevertheless, Malta also remains a cost-effective jurisdiction able to provide a highly qualified workforce and professional service providers comparable with other European jurisdictions at a fraction of the price. Malta also acknowledges the importance of its financial services sector and accordingly it has implemented several fiscal incentives that are aimed to encourage the movement of highly qualified personnel to Malta while also providing an accommodating environment to the operator.
Malta is also highly regarded in the financial services sector and accordingly, it is an ideal jurisdiction within which to grow the operation, potentially leading to IPO opportunities, whether in Malta or elsewhere. It is a compromise between the lesser regulated jurisdictions, such as Cyprus, which tend to be cheaper, and the more expensive jurisdictions, such as London, which offer a similar level of regulation.
At face value, especially when seen from an operator’s point of view, it seems that the more lenient the jurisdiction, the quicker it is to licence and the easier one can operate. Although this may work out at the initial stages, problems may arise at a later stage. The online financial trading industry is an industry led by traders and traders are now insisting on being adequately protected before putting their money with any licensed operator.
This is a guest editorial which was compiled by and represents the perspective of Omar Zerafa, Founder and Advocate, Zerafa Associates.