The UK’s Financial Conduct Authority (FCA) is one of the most zealous market regulators in the world. Loan firms, investment funds, banks and Forex brokers which hold FCA licenses are held in high esteem. What makes them so trustworthy is the long-standing practice of the regulator to heavily penalize any lack of compliance. The fines it issues are very hefty, but are also definitely capable of curbing dangerous or malicious market practices.
In the first two weeks of December 2022, the regulator has continued this practice. It has fined three brokerages and three bond traders, which were found to be in violation of its rules. The regulatory body has also issued a press release which highlights its expectations of CFD providers in the following year. Here is everything you need to know of the recent actions of the UK’s market watchdog:
Brokers fined over £4 775 000 for failing to detect market abuse
One of the requirements that the FCA has in place as part of its regulatory framework on UK forex brokers is for them to report their trades. This ensures the transparency of each of these companies and practically makes market manipulation impossible. Three brokers, BGC Brokers LP, GFI Brokers Limited and GFI Securities Limited, were found to be in violation of that rule. Between 2016 and 2018 the companies did not have sufficient internal measures to report their activity.
What’s interesting about this case is the fact the regulatory body has not actually found them manipulating any of their trading volume. However, even the possibility of that being done within such a long timeframe has warranted a very hefty fine. The companies were charged over £6 821 000 pounds for their violations. They did agree to settle with the FCA and pay their fee without any objections, which granted them a certain discount – 30% of it. The FCA allows guilty firms which settle with it to benefit from that, as to encourage the more efficient prosecution of such cases. All in all, the brokers would now have to pay a bit over £4 775 000.
Three malicious market manipulators banned from trading
In another press release we can see why it is so important for the activities of brokers to be detected. The FCA has penalized three individuals for manipulating the bonds markets of the UK. It has done so by revoking their licenses.
The regulatory body has also put forth a case before a specialized tribunal, where it demands each of the individuals be fined. It alleges that they should pay a total of £595 000, as to redress the damage caused. The three will plead before the court, which will determine what the appropriate penalty is. But what did the traders do?
Well the charges they are facing allege the following. First, they conspired to manipulate the price of the Italian government’s bonds. They started placing large orders for them without intending to actually execute them, misleading other market participants as to the price of the assets. The trio then placed trades on the other side of the order book. According to the FCA, their behavior was deliberate, continuous and dishonest – which the regulator alleges is sufficient grounds as to charge them with the hefty fees it demands.
In its press release, it also underlines how important it is for market manipulation to be prosecuted efficiently and strictly. It states this serves to discourage other instances of it occurring.
FCA underlines high level of abuse in retail CFD sector
One of the most ubiquitous requirements for CFD providers around the world is to report what amount of their clients lose money with their services. This amount can vary, with it being around 65-80%. The UK regulator has recently raised concerns about the amount of losses experienced by retail traders who deal with CFDs. It alleges that this number is 80%, and that the companies which provide the services can engage with problematic behavior.
It reports that between 2021 and 2022, over £100 million in damage to retail clients was estimated to be prevented by the actions it has taken to curb abuse. Following that, the FCA sent out a letter to the executives of CFD providers which outlines its expectations of them in the future. The full text of the letter is available on the FCA website and contains a lot of interesting information.
It identifies the three main ways in which the retail client is abused by less than reliable firms. First, there are the scam tactics they use. They include financial promotions which fail to disclose the risks associated with the trading mode. There is also the pressure these firms apply to clients to get them to deposit more. It also states that there are often inappropriate fees and stalling of withdrawals for the victims.
The second way the abuse manifests is via the circumvention of the regulatory framework in the UK. One of the most prominent ways in which that is done by malicious actors is via the qualified investor exemptions. In general, retail clients are offered lower leverage amounts than professionals, as well as additional protections. However, traders can also opt-in to get professional status. The broker guides them through the process of doing so and encourages them, without properly disclosing the risks that are present for them.
Thirdly, and most interestingly, brokers were noted to employ social media influencers. They would pay people with large platforms to advertise the services of a certain firm without explicitly mentioning the sponsorship deal they have. This is dangerous because the reach of such influencers is very far, and their viewers and followers are mainly retail traders. Of course, they would also fail to disclose the risks that come with dealing with CFDs as well!
It is obvious that not all brokers engage in this kind of abuse. The FCA underlines that. However, it also states that it does expect the board of the companies it oversees to take effective action to ensure that it does not allow any of them. Thus, the regulator sets a higher standard for the leadership of the company and will penalize them accordingly if any breach of the rules is found in the future.
