Cyprus has long been a safe haven for CFD providers looking to get access to clients in the European Union. Licences are easy to acquire, compliance is lax, and you can tout yourself as an EU firm, with the right to passport your services across the economic bloc.
This has been a point of contention between regulators across Europe. Firms regulated by the Cyprus Securities and Exchange Commission (CySEC) have a track record of overly aggressive marketing and other unscrupulous behaviour when passporting their ‘services’ to other EU countries.
So it shouldn’t be very surprising that in the past couple of months, we’ve started to see signs that regulators in other parts of Europe are getting fed up with this state of affairs and are looking at how they can prevent CySEC-regulated companies from misbehaving.
As Muinmos CEO Remonda Kirketerp-Møller wrote recently, French and Dutch regulators are weighing up changes to EU regulations that would mean firms would be regulated by the jurisdiction that most of their clients are based in, as opposed to the one where they’re licensed. In practice, that could mean a CySEC-regulated entity ends up being regulated by the French regulator if most of its clients are based in France.
This raises some interesting questions. For instance:
- What if you make most of your revenue in one country but it’s not where most of your customers are?
- What happens if the largest number of clients aren’t in the EU? Would it then be the country in the EU that has the largest number of clients that you get regulated in?
- How would any actions against a firm be enforced? Who would actually do it? If a firm was fined, who would the money go to?
Figuring out what to do with nitpicker details like this are obviously important if the French and Dutch regulators want to implement something meaningful. But beyond the legal minutiae, the end goal – if achieved – would mark a profound shift in EU financial regulation. It would effectively mean that firms would be unable to use Cyprus, or Malta, as a base for arbitraging the EU’s regulatory system.
The question is whether this really matters.
Who cares?
A major trend since CFD restrictions came into play back in 2018 was for brokers to go and get licensed outside of Europe. This has ranged from more ‘traditional’ offshore financial jurisdictions, like Mauritius and the Seychelles, to other globally renowned hubs of commerce and financial activity, like Vanuatu and St Vincent and the Grenadines.
CFD providers who’ve done this have often been able to maintain many of the things ESMA sought to ban. Ridiculous leverage ratios, deposit bonuses, and trading competitions are all still a feature of many offshore entities.
Providers have also been able to shift European clients to those entities. This is usually done with simple things like leverage comparison tables or linking various entities on the same site.
More sinister have been efforts to direct affiliates to trade with offshore entities. I went through the sign up process with one affiliate about 18 months ago to see who they were working for (IronFX – no surprise) and was explicitly directed to a Bermuda entity. BDSwiss was also doing this in the UK, which is likely a big reason it is now banned from operating here, although it’s far from the only company to do so.
All of this has created a weird cat and mouse game, where brokers try to maintain the allure of being an EU-regulated entity, while offloading clients to their offshore operations where they can still grind money out of them.
The thing is, for many CFD providers it seems as though having an EU licence is more a marketing tool than a regulatory necessity. Being able to say you have EU protections (whatever that means) has long been seen as a good way to attract and reassure clients.
With that in mind, it was interesting last week to see two firms being set up that haven’t bothered getting regulated in the EU. Invaxa, which was set up by former EverFX executive Marios Antoniou, is regulated in the Seychelles and, it seems, operating mostly out of Cyprus. I also see that an ex-AvaTrade executive has launched a brokerage, targeting French-speaking customers, in Kazakhstan – a country in which “corruption is present at every stage of judicial processes” and “[the] courts are controlled by the interests of the ruling elite.” Very nice!
This is not a novel phenomenon. 4XC has been regulated in the Cook Islands (lol) for several years, even though its senior executives aren’t based there, and it seems to have no problems operating this way.
Amusing as it may be to see which country these people are going to set up in next, and perhaps someone with better regulatory knowledge than me will correct this, but taking this approach seems…much more logical than getting a CySEC licence?
Most CFD providers want to maintain the pre-2018 churn and burn business model, with high leverage and aggressive marketing.
If you can do that by getting an offshore licence and still operate from Cyprus anyway, what is the point in getting regulated in the EU? It would probably hinder your operations more than it would benefit them.
This is especially true if most of your clients aren’t even in Europe, which is the case for lots of big brokers, with Exness probably being the best example. And even if you do have clients in Europe, and you aren’t doing anything wrong legally, it still seems more logical to just get a licence somewhere like the Seychelles (or perhaps Kazakhstan?).
Beyond regulatory concerns, the only other reason that this would be problematic is from a marketing or brand point of view. Apparently it looks ‘good’ to have a CySEC licence.
This seems to be based on the laughable idea that prospective CFD traders are, as one colleague recently put it, highly skilled financial professionals, deftly negotiating volatility by using gearing to make money, regardless of what direction markets are moving in.
In reality, most CFD customers are:
- People who’ve been duped into thinking they can make money trading, usually by an affiliate or a marketing campaign.
- People who want to punt on the market using massive levels of gearing.
This is why client churn is so high.
It’s also why I think most of them wouldn’t care if they were trading with some Seychelles or Vanuatu-regulated entity. This is the same demographic that has been buying Dogecoin on unregulated crypto exchanges for years now.
What that could ultimately mean is that an EU-wide effort to prevent regulatory arbitrage may end up not working very well. Assuming CFD providers can get licenced offshore, keep their operations in Cyprus, and not get in legal trouble for attracting clients in Europe or elsewhere, then they’ll probably just do that.
Stuff that happened
