Network Of Traders Or Financial Advice? FCA Swoops In On Social FX Trading Platforms

British financial markets regulator issues letter to companies offering copy trading services to retail FX clients, notifying intention to classify them as investment managers

LeapRate Exclusive… It was only a matter of time before one of the world’s most established financial markets regulators took the lead in investigating the possibility of producing specific regulatory guidelines concerning social trading platforms.

Today, Britain’s Financial Conduct Authority (FCA), which was established last year to supersede the long-standing Financial Services Authority in overseeing non-bank financial services activity in the United Kingdom, has issued a letter to companies offering copy trading services within its jurisdiction which was viewed by the Financial Times, stating its intention to insure that all such networks should obtain registration as investment managers.

Indeed, with the proliferation of electronic trading around the globe, some of which are offered by large FX banks, and retail FX firms being able to utilize social trading as a means of increasing trade volume and ensuring that their clients are engaged for longer, as well as novice traders laboring under the apprehension that by following a seemingly successful trader, they have more chance of turning a profit, it has come to pass that the traditional financial adviser, which thirty years ago was a human being with a brief case, making visits to private addresses, is being replaced by semi-anonymous lead traders on networks.

Thus, it appears a natural step for the FCA to consider regulating such networks under a similar framework used to monitor the activity of financial advisers. It is yet unknown, however, as to whether the specific individuals and electronic advisers serving as lead traders will have to be separately be licensed as financial consultants.

LeapRate today discussed the FCA’s impending plans with FX risk management industry leader Jeff Wilkins, Managing Director of Think Liquidity, who explained that “They should regulate how performance is tracked and advertised. I see “results” all the time that just cannot be true. They should also state if the performance is live or demo. Things change when real money is on the line.”

The fine line to be drawn when considering how to classify social FX trading networks as far as regulatory auspices are concerned should include considerations such as whether the decision to follow lead traders falls under “execution only”, meaning that the investor took the decision autonomously to use a social trading network, or whether these firms actively solicit and recommend the use of such platforms to promote the copying of trades placed by lead traders on any specific network.

If the former applies, there is potential room for debate. However, if the latter applies, then it appears that the long arm of the regulator is looming.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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