Do leverage restrictions imposed by regulators really protect retail clients? – Guest Editorial

By Natalia Zakharova, Head of Business Development, FXOpen

Several years of regulatory wrangling has culminated in yet another blow to the CFD market, this time at the hands of Australian regulatory authority ASIC, which has today passed new regulations severely limiting how CFDs are sold, executed and marketed, and restricting leverage considerably.

Many FX brokerages worldwide had understood for a very long time now that this was likely to occur, the earliest example of which was explained to FinanceFeeds five years ago by Australian senior FX executive David Batten who raised some very important points concerning ASIC’s clampdown on margin electronic trading firms.

A few years later, Britain’s FCA made significant restrictions to the method by which CFDs are marketed and sold, causing many of the large companies in the UK to form a lobby group, working with the regulator to attempt to reach a middle ground, one of which was IG Group, led by Peter Hetherington who resigned very soon afterwards after a quarter of a century with the firm. Perhaps the David and Goliath battle between the exchanges which were encouraging regulators to bear down on CFD firms so that they could get the retail client bases back onto exchanges.

This would have been the only method by which it would be possible to do that, as electronic trading firms are far more attractive to retail traders than expensive, slow and bureaucratic exchanges.

Now, Australia is following suit in a move that is likely to have a significant impact on the second largest CFD market in the world after the UK, meaning that now, all CFD providers, given that Australia and the United Kingdom are the main target markets, may well have to reconsider their product range.

As far as this new legislation is concerned, ASIC has made a product intervention order imposing conditions on the issue and distribution of CFDs to retail clients.

ASIC’s recent order which was implemented in the latter part of 2020 strengthened consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses. It also brings Australian practice into line with protections in force in comparable markets elsewhere.

Almost all reputable regulators impose leverage restrictions, with ASIC being the most recent one to introduce 1:30 max. leverage available to retails clients.

The clients will be forced to either prove that they are eligible to trade with 1:500 leverage or will have to settle with 1:30 or 1:20, with potentially minimized risks as well as potentially minimized profits.

The regulators say that their decision is based on the number of complaints they receive from the clients, involving insufficient risk warnings and misleading marketing campaigns.

And the restricted leverage and additional regulatory oversight and reporting should provide clients with the much needed protection.

But does this really work in the end?

Trading forex on margin has always been known as a high risk, high reward activity and that is one of the reasons it attracts so many customers.

Clients who feel that they have enough competence to trade or just looking for fast returns are pushed towards offshore brokers, who are still able to offer 1:500 leverage. Some brokers are reputable and hold other licenses and just have an offshore entity, but some are just bucket shops.

While offered the desired leverage, the customers expose themselves to other risks: potential manipulation of prices, inability to turn to a regulator with a complaint, unfair business practices, lack of security of funds.

So the question really is if someone keeps track if the money that the clients have “saved” by trading with 1:30 leverage offsets the losses other customers have incurred when being forced to trade with a shady broker in pursuit of 1:500 trading.

Food for thought and regulators should bear this in mind and consult with the brokerage industry instead of using a steamroller approach which results in more harm than good.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.