In December last year, I took a close look at the methodologies used by the regulatory authorities in regions with a developed FX industry, those being the Australian Securities and Investments Commission (ASIC), the National Futures Association (NFA), CySec and the Financial Conduct Authority (FCA).
Congruently, the NFA’s associated federal bodies the CFTC and SEC were touched upon although their remit is to maintain consumer protection as well as the oversight of institutional firms in North America, thus the NFA was the subject as that is the body with which retail firms hold direct membership.
At that time, it was my conclusion that the NFA is the only regulatory authority in the world which has consumer welfare at the very forefront of its list of priorities.
One particularly interesting matter is the high esteem with which the FCA is regarded, especially considering that 97% of its cases between 2010 and 2013 were settled at a discount by firms which were the subject of complaint across the entire financial industry spectrum, without so much as a compliance inspection, and further, without even a visit to the premises of the firm concerned.
Despite London’s status as the world’s largest financial center, the FCA does not require that companies whether institutional or retail, file daily reports in the way that the NFA and CFTC do, it does not conduct compliance inspections, nor does it visit the premises of companies which are the subject of complaints to ascertain if there are irregularities in practice. Instead, the FCA is reactive.
Reactive insofar that should a complaint arise, the FCA simply sends the allegations directly to the firm, asking if these are correct or incorrect, and if the firm wishes to settle without any action, it can pay a fixed fee with a discount of up to 30%, and then have the file closed.
Regulatory responsibility to FX companies, customers and shareholders alike
Today, LeapRate reported that, via a series of confidential filings made with the FCA, the account freeze in May this year which affected Plus500 was not the first time there was a client account freeze requested by Plus500 – and approved by the FCA.
Plus500 UK issued a document on October 31, 2014 to the FCA requesting the right to freeze accounts of existing clients where Plus500 determined that there didn’t exist ‘verified adequate customer due diligence information’.
We understand that, at the time, a very small number of client accounts were frozen until the documentation for those accounts was deemed up to par.
The FCA did not issue any notices to the investing public to this effect, and thus when the account freeze occurred in May this year and affected the share price of Plus500 stock, customers and investors in corporate stock were affected.
Had this been in North America, it is clear that the CFTC and NFA would have publicly notified shareholders and customers of this, thus mitigating any adversity for the FX company, its shareholders and customers alike.
International jursidiction – America leads the way
I recently conducted extensive research into the network of introducing brokers in China, many of which were located in smaller towns in certain provinces in China, but were companies with over 100 staff, and values of $200 million.
One particular introducing broker explained that, when looking for a company to work with, FCA regulation is vital. This is an interesting point because the FCA has no cross-border jurisdiction, therefore should a Chinese customer require mediation between himself and the FX company, this may prove impossible as the FCA only covers customers in Britain, with some extension into the European Union via MiFID II passporting.
The NFA, however, has the ability to restitute funds and hold directors responsible across multiple jurisdictions, but restricts its policy for brokerages to onboard retail clients to within the federal United States.
CySec is now stepping up its visits to brokerages, and ASIC, a regulator which oversees a great deal of companies with clients in the APAC region, conducts real time surveillance on the activities of Australian FX firms.
As far as regulatory prowess is concerned, it appears that reputation is indeed greater than the sum of its parts.