Brexit tug of war? Hardly! It may present excellent opportunities for FX brokers
“Since they are no longer bound by EU rules, British FX and CFD firms could see the FCA loosen some restrictions and even possibly reintroduce 1:100 leverage for retail clients” says FXOpen’s Natalia Zakharova
The anti-capitalist European Commission has had a stranglehold over British business and politics for decades, becoming noticeably more intrusive since the Labour party came to Parliament in 1997.
Whilst the UK had been a member of the European Union and common market since 1973, Baroness Margaret Thatcher’s Euro-sceptic free market conservatism kept the wolf from the door for over twenty years, allowing the UK’s capital markets and free, diversified economy to flourish unhindered by socialists from the vast governments of the continental mainland.
1997 was, however, a pivotal time for the retail FX and CFD business in the UK, as London had already established itself as the absolute global center for prime brokerage, and had become home to two very large, domestic market-focused CFD providers which are now at the very top of the retail sector, those being CMC Markets and IG Group.
Several quality firms followed suit, however the entire growth of the retail sector in Britain took place under a business unfriendly socialist government, ruled not only from within 10 Downing Street, but by unelected pen pushers in Brussels, notorious for disliking the financial services industry.
The modern European version of socialism favors two environments, those being large public sector and state owned entities, ranging from massive and inefficient government departments to partly or fully state owned giant corporations that have trade union subservience and compulsory membership ingrained into their fabric.
Both are juggernauts, unable to modernize, and house a belligerent workforce who know their rights but not their responsibilities. Anyone who has ever driven a Fiat or a Renault would be au fait with the product of government interference in large business.
The UK’s free market differs tremendously, and has ever since the industrial revolution been home to entrepreneurship and free thought, hence the massively developed and sophisticated financial technology sector which powers not only London but the whole of Europe, from just one square mile.
The European Commission’s method of attempting to clip London’s eagle-like wings has been via dramatic regulation, ranging from ESMA’s leverage restrictions to total curtailing of how CFD products – a mainstay of British trading – are marketed and sold to domestic customers.
This Channel-crossing assault on London’s sensibilities is about to come to a halt as abrupt as that of the Greek economy, as Britain has some very FX industry friendly plans post Brexit, when the worlds most important financial center and 5th largest global economy gets its own decision making powers back.
FCA CEO Andrew Bailey, one of the candidates that had been put forward for the soon to be vacant Governor of the Bank of England position, highlighted just under a year ago what he considered to be his plans for a lower burden approach to financial regulation in the UK once the UK is out of the European Union.
Since then, Prime Minister Boris Johnson has been wrangling it out with the European bureaucrats, many of whom have done what they can to attempt to paint a picture via mainstream media that Britain’s exit from Europe would be a bad thing for the financial sector in London, when in reality, nothing could be further from reality and it is indeed the other way around.
Despite the mass hysteria that has been peddled by inexperienced and sensationalist mainstream media across London, and the socialist, pro-EU diatribe which has dominated European tabloids over the past few weeks, a very minimalistic approach to cross-border regulatory reporting and transaction accountability for electronic financial services firms is likely to be set in place.
British Treasury minister John Glen is set to lead post-Brexit talks with the EU this week to strike a “memorandum of understanding” that will guide future regulatory cooperation on financial services.
Senior UK government officials have said that any agreement struck will only provide minimal access to EU markets at the absolute best and will more likely only set up a method for UK and EU regulators to swap information on decisions.
As was expected by those in the know, Britain will be free to operate its world leading electronic financial services industry without the shackles of the EU and its anti-capitalist, anti-global markets approach, and without the influence incompetent and anti-business German regulator BaFIN has over the European Commission and ESMA’s regulatory policy with regard to FX firms.
Even ESMA itself, a highly bureaucratic organization which implemented the MiFID II infrastructure directive and has the responsibility of overseeing regulatory adherence across all of the European Union’s member states, has today absolutely lambasted BaFIN, using almost expletive terminology in November 2020.
The report by the European Securities and Markets Authority (Esma), identifies a number of “deficiencies, inefficiencies and legal and procedural impediments” in the two-tier German supervisory system, which splits responsibilities for enforcement between BaFin and the Financial Reporting Enforcement Panel (FREP).
Problem areas highlighted include the independence of BaFin from issuers and government, including “a heightened risk of influence by the Ministry of Finance” given the frequency and detail of reporting by BaFin before actions were taken.
Wirecard was a rising blue chip star before its collapse following the discovery of a gaping €1.9 billion hole in its balance sheet and regulatory bodies appeared at times to be more interested in defending the firm against a rising tide of allegations rather than dig deeper into its financial accounts. Esma says Frep’s examination procedures of Wirecard financial reports did not appropriately address areas material to the business of Wirecard, nor the media and whistle-blowing allegations against the firm.
BaFIN, overseeing Germany’s financial markets, has tremendous sway within the European Union’s regulatory politics.
It was always relatively obvious to those in major capital markets regions that Germany’s arrogant regulatory authority, which requires all OTC firms to lodge client funds with German banks only, and had the audacity a few years ago to infer that a ‘latency floor’ would be enforced on FX brokers making their execution slower in order to level the playing field – ie thwart more efficient OTC firms to allow the large, old fashioned Frankfurt-based venues to keep their stronghold, is, not to put a finer point on it, ruddy useless.
BaFIN is regarded by many as one of the most recalcitrant and difficult organizations to operate under, and whose rules and imposed obstacles favor neither capital markets entities or their clients.
During the run up to the exit from the European Union of Great Britain, and during the absurd attempts by Frankfurt to merge Deutsche Boerse with London Stock Exchange – something FinanceFeeds stated from the outset would never happen – in order to try to encourage derivatives trading into Germany from London, a feat that would never be possible without political coercion because Germany cannot hold a candle to the UK when it comes to any form of expertise, infrastructure or market presence, attempts were made to take clearing to Europe, which of course failed, and here we are today with very few brokers operating under the BaFIN regime.
Bearing this in mind, what is likely to be the outcome of a truly free and self-determining British FX and CFD industry?
FinanceFeeds spoke today to Natalia Zakharova, Head of Business Development at FXOpen, a global company which has regulatory license in the UK as well as European jurisdictions, to ascertain her view on the future within FCA regulated British FX and CFD entities.
“If FCA play their cards right, Brexit can be very beneficial for both the regulator and the traders” said Ms Zakharova.
“Since they are no longer bound by EU rules, they could loosen some restrictions and even possibly reintroduce 1:100 leverage for retail clients.
So there is a lot of potential for the FCA to establish themselves as a respectable regulator and attract client deposits and trading volumes to UK-based brokers and making London the power capital of the fintech world” concluded Ms Zakharova.
Indeed, there has certainly been more than a degree of coercion from regulators outside the UK to attempt to bring the UK’s financial sector into line with anti-business rules, and to try to encourage some of the City of London’s world leading institutions to move their asset bases to Europe.
This, clearly, will never happen.
Onwards and upwards….