Shooting Yourself in the Foot: The Cypriot Edition


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.

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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.

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Shooting Yourself in the Foot: The Cypriot Edition

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