British financial markets regulator, the Financial Conduct Authority (FCA) last week confirmed, after almost a year of consideration, that its position with regard to the categorization of copy trading platforms place such entities within similar regulatory boundaries to portfolio management services, but only in such circumstances that the trades are executed automatically without any manual input from the account holder.
The FCA stated that it defines copy trading, alternatively referred to as mirror trading, as a service which allows retail traders to choose to mimic the trades of other users on a contracts for difference (CFD) platform.
Citing the requirements of the MiFID directive which sets out the required criteria for market infrastructure relating to OTC derivatives trading across the European Union, the FCA points out that MiFID defines ‘portfolio management’ as “managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments”.
This MiFID service is characterised by the fact that investment decisions are implemented without any intervention being necessary by the client other than the conclusion of an agreement (‘mandate’) between the service provider and the client on the nature and details of the discretionary service to be provided.
In light of this feature, where the service described in the question is provided in relation to MiFID financial instruments, it requires authorisation – in particular, in relation to portfolio management.
In the model described, the service provider exercises investment discretion by automatically executing the trade signals of third parties. Where MiFID applies, this triggers associated ongoing regulatory obligations including the suitability assessment, other conduct of business obligations and the provision of periodic reports to clients and regulators.
Where the client sets certain trading parameters such as the amount of money he wishes to invest or is prepared to lose, this will not affect the characterisation of the service as portfolio management.
On the contrary, where no automatic order execution occurs because client action is required prior to each transaction being executed, the activity performed will not amount to portfolio management and, depending on the interaction with the client, other investment services may still be relevant (e.g. investment advice in the case of personal recommendations, and reception and transmission of orders).
Examples of such situations where the investment decisions are taken by the client himself rather than the service provider in regard to the decisions to buy or sell the individual investments in question include circumstances in which the trade signals are investment advice (or a general recommendation), and the client is required to confirm each recommendation received in the form of a trading signal before any order is executed or transmitted for execution on his behalf, or if the trade signals themselves are fully determined by the client himself who is required to set the detailed parameters for each signal/order/transaction, such as the precise market conditions that will trigger a particular signal, e.g. the purchase or sale of instrument A when its price on market B reaches level C.
For the official announcement from the FCA, click here.