Mainstream FX brokerages refusing retail clients on grounds of market knowledge, then taking deposits via hard sell – We investigate

Perhaps the KYC procedure is being abused in certain cases to profile novice clients in order to hook them in with deposit bonuses and low deposit b-book accounts? This is likely a facet that the European Securities and Markets Authority (ESMA) has never considered, it being the architect of exactly this ability to profile such customers and then abuse them.

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An odious byproduct of the online nature of retail FX has, since the rise of small to medium sized brokerages in the middle of the last decade, been the lead churning and cost-per-acquisition digital marketing affiliate methodology that belongs well and truly outside the genuine financial services sector.

Clients are often referred to by low-end retail white label brokers as ‘traffic’ which subsequently goes to a ‘conversion funnel’, and which ever way this is viewed, it represents a conflict of interest between broker and client, with the client wanting to make genuine investments in a live market, and the broker simply recycling leads and then generating revenues directly from customer deposits.

Once the lead list is exhausted, which usually only takes one deposit per customer, out come the media buyers looking for CPA campaigns once again, aided by the vulgarity of what in many cases are former binary options sales staff hawking leads that have in many cases been stolen from their employers.

This goes hand in hand with the offering of bonuses that are applied to initial deposits which ensure that funds cannot be withdrawn until a certain number of ‘lots’ have been traded, often resulting in the dealing desk having zeroed the account.

In today’s highly regulated FX and electronic trading environment, where customer trade reporting has to be made public and collated before sending to competent authorities, as per the MiFID II regulations in Europe and the daily reporting stipulations in North America and Australia, how customers are onboarded to retail FX firms is of tremendous concern, and a matter that should be at the forefront of many brokers’ minds.

Certainly, FinanceFeeds is clearly aware of many firms continuing to buy ‘traffic’ via affiliate networks, many of which are completely disingenuous and are touting someone else’s intellectual property, or directly by approaching marketing agencies not for brand presence, but to obtain leads to churn.

This obsolete methodology is most certainly contra-regulatory, and as a result, many of the bona fide companies that operate in good quality regions with recognized regulatory structures that actually have a handle on the best interests of clients have introduced methods for ‘know your client’ to the extent of refusing business to those considered too inexperienced to trade to their own benefit, or to have small deposits in a leveraged environment combined with a less than finely honed trading ability that it would not be in their interests to trade.

Whilst this is clearly the case, there has been a highlighting of various incidents this week among retail traders that demonstrates the will of some of the more established companies in the industry to refuse retail margin trading accounts to certain customers, only to store them as ‘leads’ on their internal CRMs before later taking a deposit and bombarding them with sales calls.

FinanceFeeds is aware of a customer of a well recognized company from North America which serves clients from various branches in the UK and Australia as well as the Far East, who has detailed that the company concerned allegedly turned him down for a trading account  due to lack of knowledge, then decided to provide the account soon afterwards and deposit £250 for free. If that is not a b-book P&L share, then what is?

“I’ve been demo trading for about half a year now, and got it into my head that i was probably ready to start trading for real. Doing some research for accounts to set up I came across this particular brokerage and saw positive reviews and that they were one of the older FX brokers in existence. Seeming reliable, I went to sign up for an account with them. At the end of their account process it asks you multiple questions, testing you on your knowledge of the Forex market. I did not pass, and had my account refused. Taking this as a sign i was not ready, I’ve gone back to learning, and am currently running through the Babypips course” explained the client.

“I would have thought this the end of the story, but three weeks later I received a missed call/voicemail from the brokerage, saying that they wish to speak to me about opening my account. I ignored it, since I’m still going through the course. A few days later they called me again, leaving another voicemail to chase, and then again. After the third one I just blocked the number, but I kept getting voicemails from them. Listening to these they now tell me that they’ve gone through with creating my account, and they’ve deposited £250 for me to start spending. They also say that after five completed trades i’ll be able to withdraw the money. They have since called me about ten times, once a day, always leaving a voicemail” he continued.

Therein lies a pattern. A client is deemed too inexperienced to trade having completed the ‘know your client’ (KYC) procedure, however those too inexperienced to trade are often very much a target for low deposit vs leverage ratios for brokers operating a b-book, hence this particular broker’s decision to provide a bonus to get the client trading (obviously against the broker, not the live market) with a deposit bonus, that being an absolute telltale sign of a ‘me against the house’ modus operandi.

Perhaps the KYC procedure is being abused in certain cases to profile novice clients in order to hook them in with deposit bonuses and low deposit b-book accounts? This is likely a facet that the European Securities and Markets Authority (ESMA) has never considered, it being the architect of exactly this ability to profile such customers and then abuse them.

The trader, from England, then began to suspect that something was awry.

“Considering they originally denied me an account due to lack of knowledge (which I’m perfectly willing to accept, i was trying to jump in too early) this all seems kind of dodgy. They’re not only giving me an account, but they’re encouraging me to get to trading, when they specifically know that i wasn’t able to pass the test.”

“Is this normal behaviour for a company of this standing? Are they trying to target me like I was purely a gambler? Should I take advantage (sign into the account, make five tiny trades, close them and withdraw the <£250)? Or do I just contact them to tell them to close the account and leave me alone, or just ignore them altogether?” he asked.

Little did he realize that he would be unable to withdraw the bonus of £250, let alone a similar deposited sum.

The recent rulings with regard to leveraged retail electronic trading by ESMA were met with mixed reactions by many firms, however there were a good degree of FX industry thought leaders who welcomed such rulings and were absolutely prepared for them on the grounds of increased sustainability.

Last week in London, FinanceFeeds met with several senior FX industry executives and noted that there had been clamor in the City about a potential requirement that the license may have to be upgraded to a full market maker license requiring 730,000 euros regulatory capital adequacy in case the A-book license is done away with, however in FinanceFeeds opinion that would be detrimental to best execution requirements as it could encourage more internalization of trades.

Our consensus is that in reality, the leverage cap will force those who stay and go the distance to look for clients with $3000 deposits or upwards, thus going after a higher quality of client with a longer lifetime value, via channels that are more effective than the old fashioned media buying method, hence, if it can be taken as the truth, the allegations by the aforementioned traders are counter to such thought.

One potential cause for such rash behavior could be that many firms that have got themselves used to the direct marketing approach have now managed to find themselves saddled with a low-touch, media-buying model and are unable (or unwilling) to modernize their way out of it.

Google and Facebook’s blanket policy of disallowing certain advertisements for FX and cryptocurrency related services is a prime example of why a self-generated effort do differentiate between types of companies so that the uninitiated regulators and pseudo-controllers of the internet – Google and Facebook – are able to make proper decisions instead of block everyone, thus categorizing the good as worthy of penalization as the bad, and in some cases the ugly.

Hence, instead of going toward offline methodology, or increasing the communication channel between broker and client, this type of internal tactic is beginning to emanate.

One retail trader approached for a synopsis of this dynamic explained “I don’t want to sound like a conspiracy theorist, but I have the feeling this rush they have to encourage you to trade has to do with the limitations brokers are going to suffer from July on. If I’ve interpreted correctly the decision, any form of encouragement to trade – as in, bonus funds – is going to be forbidden.”

“It is in the broker’s interest to hook up to trading as soon as they can, so that you can be placed in the “losers” category. The broker takes the opposite side of a bad trader’s position, and they can make money this way. The more you learn, the lower the possibility of you screwing up. That’s one of the reasons why fund bonus exist, so that you can start trading right away. Since all of this is going away in a few months, I believe they are trying to milk the last drops before changing their business model” said the trader.

FinanceFeeds reached out to the broker concerned, with full information and detail from traders on this matter, and whilst a reply was provided, the company avoided the subject completely.

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