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France’s controversial new law banning advertisements of binary options, forex, and CFD trading will not cover stoploss CFDs offered to retail clients. Lawmakers in the country had voted to pass this law because these leveraged trading products are widely considered to be risky since they enticed customers to make unwise financial decisions. Leading European broking companies have asked France’s top regulatory body Autorité des marchés financiers (AMF) for clarifications on the law so that they know exactly what kind of advertisements are permitted.
AMF has clarified that regulated brokers will be permitted to advertise their CFD trading services as long as they offer certain conditions to their customers. For one, brokers will be expected to give their customers a confirmed stop loss for each CFD trade so that trades can only be opened when there is a fixed stop loss in place. In addition, a client who has used up his or her money will have to be automatically stopped from trading, thereby ensuring that he or she does not achieve negative balance.
In fact, many financial regulators of countries in the European Union have been exploring ways to control the marketing of online trading products and even their trading activities. The regulators have received large numbers of complaints from retail investors regarding brokers who have cheated them. Belgium has gone to the extreme of banning online leveraged trading completely but this has only driven its citizens to unregulated brokers operating from offshore. Germany’s top regulator known as the Federal Financial Supervisory Authority (BaFIN in German) has a rule requiring brokers to ensure that traders cannot lose more money than they had deposited. Holland has also passed a law similar to the one in France.
Most online forex brokers offering services to Europeans are based in the United Kingdom or Cyprus. The regulators in both these countries, namely the Financial Conduct Authority (FCA) and the Cyprus Securities and Exchange Commission (CySEC) are planning to keep leverage at a maximum 50x and also to ban deposit bonuses used to attract retail clients to open new accounts or feed existing ones.
The share values of publicly traded brokers have been badly affected by the negative press they have received on account of the customer complaints and the laws restricting their activities. In fact, the loss in market capitalization of these companies has been around $2.4 billion, with a big chunk of the market cap disappearing in the last few months of the previous year. Interestingly, the biggest European brokers reposted good results throughout the year and their trading volumes were unaffected by the unfriendly legislations and rules.
IG Group Holdings plc has released a statement that is no doubt motivated by the clarification from AMF. The company said that the new rules in France would actually give it a competitive advantage in the highly lucrative business. The reason for the company’s confidence is that it is one of the few companies operating in France which has the technical capability to conform to the regulations of the AMF.
It is safe to say that the present regulatory climate in EU countries will hardly affect the volume of trades overall. However, the restrictions will make it very hard for smaller brokers to gain a foothold in the industry that is dominated by larger and well established players since they depend very heavily on aggressive advertising and a strategy that involves providing very high leverage and bonuses to customers. All the same, retail customers do require protection from risky financial products because it is very easy to lose a lot of money on them in a short time.