Going offshore will kill your business

For quite some time, FinanceFeeds has been an unequivocal advocate of evolution via reinvestment, especially when new challenges face the retail FX brokerage sector and there are some capital reserves that could be utilized to make the necessary changes that are often needed to keep up with the demands of increasing regulatory requirements and market dynamics.

Ever since the rise to prominence of brokerages which entered the FX trading sector via affiliate marketing and off-the-shelf infrastructure methodology, a dichotomy has existed in that some brokers have tended to remain unlicensed and onboard clients offshore (that includes firms with a cursory CySec licensed entity and then onboard most of their clients via an offshore Caribbean location), and then there are the others which have steadily grown their business and entered into developed markets, gaining good quality licenses on the way.

The latter is the most sustainable route to a long term business, however in the aftermath of recent regulatory rulings such as that by ASIC which has prevented FX firms from onboarding non-Australian clients, having a potentially decimating effect on those which have relied heavily on Chinese IB networks, brokerages have been faced with a choice.

The choice is quite simple: Either to take the good and solid revenues earned from having garnered a very well organized Asia Pacific-based partner network, and reinvest it into developing trading systems and product ranges that would take a retail broker into new and popular audiences, and join the realms of the new, app-based retail trading platforms which allow bank accounts, mortgages and trading on one app, or to rival the challenger banks such as Revolut.

The amount of high ticket venture capital that is being invested in these new entities is enough of a measure of the confidence that the financial world has in them as the future structure of banking, retail finance and technology and their own system and customer base means that their intellectual property is their own when it comes to valuation time for public listing.

With MiFID II in Europe stipulating that all trade reporting must be correct and all infrastructure must fit best execution practices for regulated marketplaces, ETFs or market makers, leverage restrictions in place, and with Australia about to follow suit with the added aspect of the US-style ruling on no cross border client bases, firms can either invest in their future and aim toward a domestic, good quality audience which requires multi-asset trading and a modern experience, or throw in the towel and go offshore.

Going offshore means keeping the Asia-Pacific IB network churnable, but it means no credibility and no chance of ever operating in developed markets which is where the majority of the good sustainable new business is.

Once the Chinese government has developed an algorithm which successfully blocks the IP addresses of every new broker that attempts to attract clients from outside, unregulated firms will be left with parts of South East Asia, and the undeveloped nations in Africa and the Middle East.

Enough to sustain a business? No. Not by a long way, because the governments and central banks of many African nations are now looking to ban all unlicensed FX brokers – and by that they mean ones with registered offices on islands.

The ability of unlicensed b-book FX brokers in the Middle East, Russia and Asia to onboard clients from Nigeria, Kenya and Ghana, along with some other East and Central African nations has been a byproduct of the overall distrust that residents of those countries hold in their own government and monetary system.

For example, Nigeria has been a target market for some brokers largely due to the chaotic nature of its own financial system and massively varying Naira rates, leading to an IB network that holds physical seminars and refers clients to offshore brokers, some of which do not mean well at all.

Today, Kenya’s central bank issued a warning against dealing with unlicensed and unregulated online forex traders which differed from previous anodyne soundbites in that this time, the authorities are looking to arrest brokerage executives who seek to onboard Kenyan clients via offshore platforms.

In a public notice published in local media yesterday, the banking regulator said those platforms are downloadable on Google Play and Apple App Store, and aggressively market themselves through social media, promising huge and instant returns.

Many of these are mobile versions of MetaTrader, operated by offshore white label partners of other b-book brokers.

“The purpose of this notice is to warn members of the public against dealing with unlicenced and unregulated online forex dealers. They should only deal with genuine and licenced financial institutions and entities’’ the Central Bank of Kenya statement read.

It asked members of the public to report complaints regarding these illegal dealers to the Banking Fraud Investigations Unit.

A spot check by a local investigator in Kenya on Google’s Android Play application download system found a dozen of forex trading apps that had been prioritized to appear when a local IP address was searching for them, including Go Forex designed by GoForex 24, FXPesa by EGM Capital, Iron Trading, Forex Game, Trading Signal, the amusingly named Bimono Trade Olymp Trade among others.

The Kenyan central bank did not state that a firm would have to be regulated in Kenya, instead inferring that a license from a reputable financial markets regulator is the differentiating factor, and for clients not to use totally unregulated firms.

Kenya’s capital markets regulator the Capital Markets Authority (CMA) estimates that about 50,000 people, including brokers, dealers and money managers, are in the business and are mainly using offshore platforms that are not overseen by Kenyan regulators to offer the service.

In April, CMA raised red flag on increasing number of illegal forex traders, with CEO Paul Muthaura warning them of dire consequences.

“The Authority will also take appropriate enforcement action against any persons or entities illegally conducting online foreign exchange trade or collecting client funds in contravention of the above regulatory provisions,” Mr Muthaura said.

By canceling a good quality license and going offshore – an example being IC Markets, a company that makes over $500 million per month in revenues and is one of MetaQuotes largest customers with a substantial number of server licenses which recently headed to the Seychelles following Australia’s ruling on overseas client bases, otherwise reputable FX brokers are putting themselves in the same category as these oddly named non-entity white labels and will be unable to do business in the vast majority of regions worldwide.

It is not prudent to hold nations with third tier regulatory structures and undeveloped economies as a sustainable audience and an ‘easy target’ because they have been targeted for several years by entities that have not meant well, therefore are vigilant and are beginning to outlaw the activities of such firms.

Therefore, by going offshore, brokerages would never be able to approach clients in Europe, North America, Australia, Singapore, Hong Kong, China or Russia, and similarly, the nations that they would seek to rely on will follow Kenya’s lead and begin to arrest owners of unlicensed firms doing business with retail customers on their territories.

Thus, the regulated, genuine method of doing business is the most sustainable. It requires a bit of investment to ensure that regulations are met and that products are appealing to a dynamic, modern and astute investing public in first tier jurisdictions, but it is well worth it.