The regulatory system allowing financially regulated companies to register cross-border in the EU has UK players worried.
An interesting article in today’s Financial Times points out that many established UK-based, FCA-regulated brokers are concerned about the growing number of ‘passport’ brokers from other EU countries setting up shop in London.
The article points out that 45 foreign brokers offering forex or CFD trading passported into the UK last year, compared to just 29 in 2010, according to FCA data.
The FT contends that the influx in foreign brokers coming to the UK has sparked concerns among industry leaders, who argue that these brokers threaten the sector because they do not come under the same strict regulatory scrutiny of the FCA, while still operating freely in the UK.
Some background. The European Union law that stipulates for unified regulation for investment services across the European Economic Area (EU plus Iceland, Norway and Lichtenstein) called MiFID (Markets in Financial Instruments Directive) brings extra competition to brokerages locally regulated by UK’s FCA.
Companies such as IG Group (LON:IGG) and City Index which have obtained licenses under the FCA are now facing competition on local turf from CySEC regulated firms such as ForexTime and Liquid Markets. Most of the binary options providers are also regulated in Cyprus, and their numbers are growing.
According to the FCA these EU registered companies are authorized and registered under their home state entity within the EEA, however they may be subjected to limited regulation under the UK authority. The FCA emphasizes on protection of clients’ money and custody assets, and has no control over foreign regulated entities and their compliance to their home conditions.
The main advantage of locally regulated firms is that customers are generally interested in such issues as how safely their funds are being stored and the FCA has a much more trustworthy image in the eyes of the public, especially since the traders’ crowd in London is quite a substantial one.
As the appetite of foreign brokers to UK customers increases, some of them choose to become FCA regulated despite having other EU country’s license. Others, such as Monex Indonesia have simply changed their plans after the EU Cyprus bailout and didn’t even activate their CySEC license.
We should note, however, that despite what happened this spring many forex and binary brokers continue to flock to set up shop in Cyprus.
This whole issue digs deep into the big EU banking union question: Would an FCA regulated deposit insurance scheme have the same value to a customer to one promised by the Cypriot government and CySEC? We leave the answer to this question to our readers, as the deeply intertwined European regulators move on to find efficient ways to work across the continent.
We’d welcome your thoughts on the subject, which is indeed a touchy one. Please leave them for us (and all the other LeapRate readers out there) below.
For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.