France goes increasingly concerned over social trading risks

Maria Nikolova

French consumer organizations and legal experts get increasingly confused on how social trading is supposed to be less risky than self-directed trading.

A traditional promise made by social trading networks is that newbies can count on the professionalism of signal providers or lead traders as a safer way to enter the online trading world than by relying on their own trading skills. Claims of certain amounts of gains have often accompanied this traditional promise.

French consumer organizations and legal experts, however, have been increasingly expressing their confusion as to how social trading is supposed to be less risky than the traditional self-directed type of trading. Online magazine Capital quotes Matthieu Robin, of France’s consumer association UFC-Que choisir, who says that the risk associated with social trading is not lower than the risk associated with traditional trading. Mr Robin does not see how the social trading system is excluded from the disastrous statistics for the retail FX sector.

According to numbers provided by France’s regulator AMF, nine out of ten retail FX traders lose money, with the average loss being at EUR 10,900. Data from the Paris Public Prosecutor’s Office, show that losses associated with trading of high-risk products like FX and binary options have topped EUR 4 billion over the last six years.

The report notes that the bigger problems stem from the operations of social networks that are either not regulated or have multi-layer structure of various entities responsible for various operations. Consumer advocate Catherine Lam warns that it is often impossible to know which company is actually responsible for the social trading service, as there is one company that has its name on the platform, another, whose name is mentioned in the T&Cs, a third – receiving the payment, a fourth is in charge of the order execution, etc.

The concerns associated with incorrect companies who provide self-directed trading services are relevant for the world of social trading too.

France has early this year seen the implementation of the Sapin 2 law, which prohibits the advertising of high-risk financial trading instruments like binary options and high-leverage FX and CFDs. Many companies have, however, refused to comply with the ban and continue to market their services to French clientele.

Talking of social trading regulation in Europe, we should note, of course, the MiFID II regulations that are set to come into force in January 2018. The new rules, inter alia, cover social trading networks. As firms continue to offer social trading and copy trading services, albeit on a much lesser scale than just a few years ago, the UK Financial Conduct Authority (FCA) has allowed trading volume to be generated via the automatic execution of trades to continue thus far, however as the January implementation of MiFID II approaches, the requirement to register as an investment manager with the relevant competent authority will be enforced.

This means that all companies offering such a service will have to make sure that every lead trader passes portfolio management examinations and registers as an investment adviser.

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