Australia unveiling new law to decimate smaller FX firms. Anti-competitive, or just plain common sense?

Reports this morning across Australia have stated that the government is in the process of making some potentially significant changes to how FX and CFD companies can operate within Australia.

The byproduct of such changes would give large, established companies from the US, Canada and Great Britain – namely GAIN Capital, IG Group, OANDA Corporation and CMC Markets a significantly larger foothold in the Australian market, further improving Australia’s standpoint as a top quality region, emulating the customer-first approach of the United States.

Australia has become widely recognized as a jurisdiction which is home to a very ethical business environment and as a result of very sensible and conservative regulation by the Australian Securities and Investments Commission (ASIC) which uses highly technological methods of monitoring electronic trading firms’ activities, as well as a vital strategic location for attracting business from the Asia Pacific.

In order to maintain its standing as a highly desirable place to do business, Australia’s authorities have gradually begun clamping down on smaller FX and CFD companies over the last year.

At the end of 2014, ASIC began intentionally slowing down the process of issuing AFS licenses to newly established FX brokers, or FX brokers from abroad wishing to open offices in Australia, whereas issuing licenses to financial services firms in other sectors remained almost instant.

Following this action, ASIC began closing down certain firms which the regulator did not consider fit to operate in Australia, and made continual statements on half-yearly regulatory reports that FX and CFD trading is under the regulatory microscope.

This year, FinanceFeeds reported that Australia may even ban CFD companies altogether.

Bye bye hedging by using client funds – trust accounts are the future

Today’s report shows that as a result of the practice of using client money to hedge against risk which is similar to a bookmaker laying off bets with other bookmakers to reduce exposure to a large payout, a common practice among smaller brokerages, Australia wishes to put an end to his and force such firms to hold client money in trust.

Under the government’s proposed amendment to the Corporations Act, up to 20 small FX brokerages and electronic trading companies in Australia could be forced out of the market or reduce the range of products that they offer because they will not have the financial resources to hold money in trust without hedging.

Safety first!

The newly-founded “Australian CFD and FX Forum” has been brought about by a joint effort between Australia’s Assistant Treasurer Kelly O’Dwyer and the large FX firms mentioned previously which are considered to have worked closely with the Australian government in order to bring about a change in how client funds are held (in trust) and that they cannot be used for hedging.

The Australian CFD and FX Forum intends to represent the best practice in the industry to protect the interests of customers.

A Senior lawyer who has vast experience in lobbying the government on important matters regarding to FX and CFD industry, Hugh Fraser, Principal of FCC Partners in Sydney, was brought onboard to assist in lobbying the Australian authorities with regard to this matter.

The retail FX industry has made such remarkable steps across the world in terms of regulation, trading infrastructure and the means by which business is conducted with the best interests of clients in mind, and Australia’s standpoint is a good example as the country has long been held in high esteem by Asian partners as a ‘western’ location, and has not had to remove the litany of Asian non-entities from its books en masse in the way that New Zealand has had to over the last few years.

This has led Australia to be a prime choice for large, good quality brokerages such as the four mentioned here, from some of the regions of the world with the most established financial services sectors.

With regard to industry sentiment on this matter, Paul Casey, CMC Markets’ Head of Compliance, placed a public statement on the company’s website saying

“The issue has been extensively examined by ASIC and Treasury in recent years. Legislative reform to benefit and better protect investors is straightforward and should be introduced as soon as possible.”

Mr Casey criticized the existing system by stating that it had put investor funds in peril and detracted from “Australia’s standing and reputation as a global leader in financial services regulation.”

Some firms are less willing to demonstrate their willingness to welcome the new plans.

IBFX Managing Director Alex Douglas stated “There’s no doubt that one group has put in a big lobbying effort, all under the guise of providing greater protection for clients. But it is undeniable that a consequence of that will be that it will damage some of the small players and reduce competition.”

Indeed, Australia’s continued efforts to remain a top region for retail FX go hand in hand with the country’s very conservative approach toward all electronic trading industry participants. It would not be unfair to say that its laws and regulations with regard to retail FX are indeed more stringent than those of the United Kingdom.

Fair go, mate!