Large number of under-18s trading with major brokerages
KYC stands for Know Your Client and is part of the compliance procedure for all regulated FX companies, yet an unprecedented number of minors have trading accounts with major retail brokers by using fake documents
There is a fine line between teaching young people financial responsibility and entrepreneurial business ethic, and allowing them to engage in a vast financial market structure that is the preserve of highly experienced and often professional traders which would end up far too daunting, resulting in losses.
Financial markets regulation in widely respected jurisdictions with developed capital markets economies have for many years stipulated that the minimum age at which any financial product can be provided to a retail customer is 18.
Banks would never issue a credit card or loan to a minor, nor would they issue life assurance, a pension or a mortgage, however many large FX firms with FCA, CySec and ASIC regulation – all of which are subject to regulatory ‘Know Your Client’ (KYC) mandatory procedure, have substantial numbers of underage individuals with active live accounts.
This would also be very easy for the companies concerned to identify, as public forums are awash with enthusiastic and youthful traders with in some cases an incredibly comprehensive understanding of the technological and financial topography of our industry, all of whom admit to being underage and having used falsified documentation in order to gain the account.
Back in the long-passed days of analog financial services, when Allied Dunbar or Prudential used to employ ‘Home Service’ representatives who would visit customers and sign them up for financial services products, conducting KYC procedure was much easier, largely because the company’s sales representative met face to face with the client, and could personally verify the authenticity of documentation.
In today’s electronic and borderless world, however, that is a great deal more difficult. Many FX brokerages simply require a short questionnaire on how knowledgeable a new client is with regard to risk strategy and trading major currencies on retail platforms, along with a copy of a passport, proof of address and a photograph.
KYC procedure originates back to the 1980s with former British Prime Minister Margaret Thatcher’s inauguration of what was then the Financial Services Authority (FSA) in 1986, however despite the metamorphosis five years ago into the FCA and the adoption of KYC procedure by many other bona fide regulatory authorities worldwide, the procedure itself is more geared toward the analog days of the 1980s than the electronic, non-face-to-face era of today.
Among questions asked to experienced traders just over this weekend include very detailed trading scenarios which are encouraging due to the level of common sense applied by very young teenagers, however they in many cases openly admit to obtaining accounts on false pretences and to being underage.
One particular post yesterday was “Hi guys , started trading about a month ago and I started using a live account about 2 weeks ago. I’m from the UK, England as stated in the title.”
“I am 16 years of age and I registered to the broker through using my brother in law’s ID. He is with the bank Natwest and he opened up a separate bank account in his name for me to use with withdraw/deposit funds etc. but to get to the point , my question is will my brother In law(me) have to pay any tax on any of the money withdrawed from my brokerage balance. From reading online and asking peers I have been told that it is completely tax free but I would appreciate some official document if available to show my brother in law to clear up any uncertainty” asked the youth.
The broker concerned is a very large and well known Australian firm with offices in several global jurisdictions and has a very good reputation.
Another question was posed on a specialist forum for retail traders, asking “I am 15 years old and my parents won’t let me do such stuff and I created a bank account without them knowing but now all I need is a forex broker that doesn’t require ID/Documents.”
This may be more difficult, however someone with this much will would easily be able to find a willing accomplice who is over 18 years old to sign him up, and off he goes. There is literally no risk to anyone who provides false documentation, either, as the broker would always be under the impression that such an account would be in the name of the over 18 account holder, so fraudulent access would never be flagged up, and if the account loses money, the very maximum it can go to with any B-book broker is zero, hence no debt would be owing from the actual account holder.
These examples may well be new, but the trading of accounts by minors is not a new phenomenon by any means, and would only take a couple of simple searches by regulators to be able to put a stop to it, yet it is completely overlooked.
Some experienced FX traders see the interest in FX by minors to be encouraging, due to the advantageous knowledge of financial markets that it affords to young people, hence potentially educating them to be able to create independent incomes, in some cases encouraging them.
Last year, a trader explained to a minor on a public forum “To start trading, I think you need to be at least 18 however, I would recommend you to start learning how the Forex market works. You’ll have more than enough time to build and refine a strategy and system. 2 years of paper trading, back and forward testing will give you a wealth of experience which most traders lack when they start trading. The learning curve of Forex trading is extremely steep, so these 2 years would be extremely valuable to your progress and learning. If you’re interested in learning with a group of new traders, you can join us as we offer a healthy private trading community.”
Another actually encouraged the falsification of documents by stating “It is good to know that you interested in trading at such a young age. However, you might need a guardian to open up a trading account for you since you are still below 18 years old. I suggest you practice first in a demo account. It is the same in technicalities as that of a real trading account but you get to use virtual money instead of real money on your transactions. That would also be beneficial so you can be able to develop your trading strategies. It is ideal to spend at least 1–6 months of demo practice before you venture into real trading.”
The technology for FX firms to be able to avoid this type of liability exists today, however it is very much in limited use, despite its absolutely perfect match for the FX industry’s compliance procedure.
Biometric recognition, for example, would require facial and fingerprint authentication before allowing any access to a trading account or to perform activities such as withdrawal or deposits.
Ironically, it is the companies outside the mainstream product ranges that are pioneering this. DMM.com, one of Japan’s internet giants, began to bolster cyber security via the introduction of biometric authentication for customers of its DMM Bitcoin division.
Last month, FinanceFeeds reported that the biometrics authentication, which is available via the Polarify app for Android devices, will enable customers to login using their voice, face, or fingerprints. The company has already implemented 2-factor authentication, along with SMS and e-mail authentication methods.
If a facial recognition system is required, then any person who differs in appearance from that on the KYC documents would not be able to access the account, and it is highly unlikely that an underage trader would have the person whose documents he used by his side at every login attempt.
Just as the leading edge fintech created a ‘regtech’ – Regulatory Technology – sub-sector, reporting and trade repository procedures are far from the only requirement within the retail FX industry.