CySec has made tremendous steps to encourage good business practice in the most highly developed retail FX center on the planet. Here is what needs to happen next.
Cyprus has become the world’s most well recognized global retail FX industry center, its retail brokerage industry making up a disproportionate percentage of the entire company’s economy.
Over the past few years, the plethora of retail brokerages have been joined by companies which provide full solutions to the FX industry, including platform companies, technology vendors, signal and education providers, prime of prime brokerages, bridge and integration specialists that connect retail platforms to Tier 1 liquidity, and even specialist lawyers and regulatory technology companies.
It is fair to say that whilst London is home to the world’s most prominent institutional, interbank and long established electronic trading giants, Cyprus is retail FX central.
Along with this entire framework which is completely self-sufficient comes the need for a progressive, up to date and good quality regulatory authority which can engender good business practice an ensure Cyprus remains the retail FX center for the world and the default choice of all firms wishing to establish retail operations under the MiFID rules, as well as ensure that any nefarious activity which seeks to cause damage to the reputation of Cyprus as a top quality choice of location for retail companies are not allowed to prevail.
To a large extent, CySec has achieved tremendous steps forward, rising up not only from its origins as a fledgling regulator – it is not steeped in history in the same way that America’s National Futures Authority (NFA) or Commodity Futures Trading Commission (CFTC) are. The CFTC is governed by political party senators and has a vast budget which stands it out as the most consumer-focused regulatory authority on earth. Continual monitoring is carried out, firms have to report each day to the NFA and if any irregularity is discovered, an official will set next to the CEO’s desk for three months and ensure that every single aspect of the business has been investigated.
If any irregularities are discovered, the firm is sued in a federal court, customers are restituted and the entire details of the case and its reason for being brought about, decision and (often very heavy) fines are published on the internet for all to see.
America does not need to kowtow to small retail brokerages, however. Its economy is vast and varied. Cyprus has a fine line to tread. Its economy is fantastic and in great condition, but it relies, as a country with a population of only 800,000, on tourism and the FX industry, therefore regulators need to ensure that the rulings are firm and adhered to properly, whilst maintaining a very good environment for the companies themselves and their customers worldwide.
Domestic audience vs international audience
Cyprus has another achilles heel, which is that no customers of Cypriot companies are based in Cyprus. It is an industry center, not a market. This means that CySec has the burden of having to be lobbied constantly by overseas regulators with regard to the companies that it overseas, whereas American authorities have direct jurisdiction over their companies as all of the customers of American electronic trading firms are domestic.
This has presented a great difficulty for CySec in that cross-border jurisdiction is difficult, however the ability for a regulator to deem a company unfit for any market still lies with CySec and in the case of firms such as IronFX, which continues to operate unrestricted despite its widely known treatment of overseas IBs and customers in many regions, particularly China where IronFX had a massive introducing broker network.
Even the Cyprus government is speaking out – something that no government ever does, anywhere.
In the summer of 2016, senior political party leader Andros Kyprianou, who heads the Cypriot party AKEL which is currently in opposition to Nicos Anastasiades’ Democratic Rally party, issued a letter which made reference to relevant posts on electronic media including accusations that IronFX have not been abiding by the regulations as required in order to maintain correct business practice as outlined by the national regulatory authority, CySec.
Mr. Kyprianou’s intention at the time was to take further steps toward safeguarding the retail FX industry in Cyprus and its global customers, alongside steps that have been made by CySec, which has been increasing its prowess in order to keep pace with the ever advancing structure that now stands Cyprus out as the number one destination for retail FX and the ancillary services that support it.
On May 18 this year, Mr. Kyprianou began to take this stance further, and is preparing his party to challenge an alleged in action by CySec over the continued operation of IronFX.
Alleged non-payment of introducing brokers and strategic partners in China by IronFX led to a very large media campaign against the company in mainland China, and as a result, Chinese national news agencies have shown continued interest in covering aspects such as this, relating to IronFX.
As a result, Marina Savva, Mr. Kyprianou’s personal assistant, contacted Xinhua recently in order to explain that Mr. Kyprianou had written directly to CySec in order to ask why the regulator had not made steps toward the withdrawal of IronFX’s CIF (Cyprus Investment Firm) license following its fine of 335,000 euros for what the regulator stated were possible violations of the Investment Services and Activities and Regulated Markets Law.
No restitution powers. Can Cyprus follow Australia?
FinanceFeeds conducted some extensive research into this, and why the status quo has allowed to prevail, and understands that CySec does not have restitution powers, nor does it have any authority by which to take companies under its jurisdiction to court. Chairman Demetra Kalogerou has brought the regulator to its current, much more developed, stance almost singlehandedly, and for that she must be commended.
It will take legislation and court rulings to be able to adjust CySec’s remit suitably in order that it has any criminal prosecution powers, ability to file restitution orders or to work in conjunction with law enforcement agencies abroad in order to wind down villainous organizations.
Australia’s government realized the importance of this at a very early stage in the retail FX industry’s growth. Australia became a very attractive region from which to approach the Asia Pacific region by retail FX firms, and rightly so – it is highly advanced in its infrastructure and business environment, is a Western country, has a fantastic economy and quality ethics, yet is part of the APAC region’s trade zone.
Big Brother is watching you
ASIC, the Australian regulator, devised two very important methodologies very early on- one was the implementation of First Derivatives’ real time surveillance system that continuously checks the activities of all firms with an ASIC license and has proven completely infallible, and the other being its ability to take companies to civil or criminal trial as well as actually wind their operations up – not just remove or suspend their license, but to send the bailiffs in and actually close the company down. “Fair go mate, you’re a doner” as they say.
This has gained Greg Medcalf, Australia’s regulatory leader, tremendous respect and has engendered a very good environment for Australia’s top quality and highly respected companies, including giants such as Invast Global, whose Pure Prime service was launched recently, with Geoff Last’s 39 years of experience in the industry being a huge benefit, and AxiCorp with Rajesh Yohannan now at the helm, whom I spoke to in great detail yesterday, his enthusiastic and upbeat parlance pointing to a great future for the firm in Australia under his leadership, poised to expand globally.
Australia has protected its markets from abuse, takes a very dim view of margin FX firms that do not abide by the law, and has actually closed down several firms and disqualified their directors from ever operating a financial markets business, and in some cases sent them to jail. Yes, a financial markets regulator that sends con-men to jail.
CySec, whilst on the right track and has made its stance clear that it will not tolerate abuse of the law or misbehavior, would be able to take its actions into its own remit rather than relying on customers approaching a national ombudsman, which is difficult to do if the customer is not Cypriot, and all customers of Cyprus firms are not Cypriot.
The company removed the license of ACFX, which owes a fortune to its customers. FinanceFeeds investigated the company’s operations and found that the entire management team had cut and run, many of them joining LCG, a publicly listed company in London, yet having not settled the outstanding amounts that they have taken from their previous customers at ACFX.
FinanceFeeds contacted CySec to ask what steps will be taken to ensure that this does not go unpunished, and to ask what will be done about IronFX’s continued business operations even though two years of non-payment of Chinese IBs has prevailed, and Cyprus government officials have written letters. No answer was proffered.
If I know who was involved, then CySec for certain does, yet has no powers with which to prosecute individual directors or corporate entities.
In May this year, Demetra Kalogerou addressed the major senior executives of the entire global FX industry at iFXEXPO in Cyprus, beginning with a positive outlook “Following the bail-in of 2013, many in Cyprus and abroad predicted the end of Cyprus as an international business centre. How wrong they were. This has not happened. Despite the remaining challenges, three years on, Cyprus has maintained its role as a successful regional business and services destination” she quite rightly said.
WIth regard to new license issues for FX firms, Ms. Kalogerou said “The flow of applications submitted to CySEC from Cyprus and abroad to license new regulated entities continues unabated. CySEC now supervises 532 entities, with 136 awaiting examination for licenses. Today, 213 investment firms are licensed and regulated by CySEC to provide financial services. Out of these, 130 firms provide forex and binary options for retail investors, which are consider sophisticated financial products.”
“In 2014, CySEC took the unprecedented step of classifying binary options as financial instruments under the MiFID legislation” she added.
This has now become a haunting factor as binary options firms, most of which are not owned or operated by Cypriot management and are using market making “you against the house” platforms from Israeli companies which are now in the spotlight for their massive fraudulent activities that involve recycling lead lists from gambling companies, pretending to offer a financial markets trading environment and then ensuring that clients cannot win or withdraw.
The Israeli government has expressed extremely vocal disdain for the binary options industry, with one particular senior regulator having said last week that he wishes to put a complete stop to it. Many nations worldwide are now banning binary options firms from soliciting clients in their jurisdictions.
Britain regards binary options as a gambling product, and licenses binary options providers via the Gambling Commission. That is stretching things a bit, however, because although gambling is legal (!!) in Britain, binary options has been widely cited as being worse than gambling because it purports to be a financial markets environment, yet is trader against house with little chance of a win, and its company owners come from the affiliate lead buying/online gambling and adult entertainment sector rather than the sophsiticated and highly astute circles of the electronic trading and financial markets business.
The intentions were good – CySec saw an opportunity to encourage more business, yet the outcome is that binary options firms are now so omnipresent, as is the brown cloud of disapproval of that entire sector globally, meaning that when an investor sees a binary brand with a CySec license, this leads to tarring the entire business with the same brush.
A binary options victim who has never been an industry executive, or has never visited Cyprus does not know that Cyprus is a highly advanced center for FX, home to some of the most astute professionals worldwide and hosts a totally self sufficient an highly well organized FX industry, in the same way that the same victim does not know that the actual company itself is a white label of a nefarious Israeli binary options market making platform provider, thus Cyprus gets the metaphorical wooden spoon by default, which it does not deserve.
On this basis, Cyprus could either de-regulate binary options altogether, or consider them to be licensed under gambling rules. Cyprus has enough good quality FX industry participants not to need to soil the soles of its shoes by associating itself with binary options.
FinanceFeeds conducted some research recently and found that many binary options firms are now looking to register as FX companies, as they realize that the end of the road may be nigh. This will be interesting as to whether CySec allows them to do so, despite any nefarious track records.
Ms Kalogerou stated during an address in which I was present that the promotion of financial products and services including individual marketing communications practices and call centers is on the regulator’s list of key priorities for the future. This is a good thing, as it stops firms wishing to make daft claims doing so from within Cyprus.
The assessment of appropriateness of certain financial products for customers, and more particularly on the implementation of proper procedures by CIFs whilst offering complex financial products, such as forex and binaries is another priority.
Ms. Kalogerou stated that nineteen additional on-site checks at CIFs and Administrative Service Providers will take place, particularly focusing on Anti-Money Laundering compliance.
Also, CySEC will prepare and issue new circulars, which will better inform and guide regulated entities as to full implementation and compliance with their legal obligations. These circulars will include the following:
Safeguarding and reporting of the client monies by CIFs, the promotion of financial products and services, the assessment of appropriateness test, tied agents, introducing brokers, call centers and liquidity providers.
Upgrading institutional/legislative framework
At a fundamental supervisory level, CySEC has stated that it continues to prioritize the upgrade of its institutional framework to ensure Cyprus remains a fully harmonized with the latest European directive. MiFID ΙΙ and the Anti Money Laundering Directive (AMLD IV) have already been promoted in Cypriot legislation, whilst the important legislative changes under the legislative package on market abuse (MAD/MAR), the EMIR Regulation, the Regulation on key information documents for packaged retail and insurance-based investment products (known as PRIIPs) will be adopted. CySEC remains committed to ensuring Cyprus is fully in line with the latest European legislation.
MiFID ΙΙ is a very important piece of legislation for CIF. The legislation has several core objectives, including:
- Increased investor protection
- Alignment of regulation across the EU in certain areas
- Increased competition across the financial markets
- Introduction of reinforced supervisory powers.
In seeking to achieve these objectives, MiFID II contains a broad range of complex provisions.
Investor Compensation Fund
Significant changes will also be made to the regulatory framework including the Law on the Investor Compensation Fund and the relevant Directive in order to reflect market risks.
The framework created via the BRRD provides authorities with more comprehensive and effective arrangements to deal with a failing investment firms, especially the market makers at national level, as well as cooperation arrangements to tackle cross-border investment firm failures.
Upcoming regulatory enhancements are designed to increase market transparency and improve compliance with the framework that is designed to protect investors. This, CySec assures us, remains CySEC’s number one priority.
FinanceFeeds would like to see Cyprus continue to evolve and refine itself as the number one center for the retail FX industry. Whilst great steps have been made and we applaud Ms Kalogerou for having been able to create the framework for the industry to flourish, the next few years ahead will likely require the invocation of powers to restitute and wind up those who break the law. Cyprus is a small and efficient country with a massive interest in maintaining the FX industry, and does not have to pass laws through a house and senate, therefore this should be quite straight forward.
FinanceFeeds is also committed to taking its part in engaging with FX companies and all of the ancillary service providers in Cyprus, and will be hosting the second Cyprus Cup event on November 3 this year in Limassol. We very much look forward to seeing you there.
Photograph: Kalavassos, Larnaca District, Cyprus. Copyright FinanceFeeds#Brokers, #cyprus, #cysec, #fx