FNG Exclusive… FNG has learned that Spanish financial regulator CNMV is looking at taking fairly drastic action against foreign Forex and CFD brokers, which might include the outright banning of many brokers from providing service to Spanish traders.

The (potential) action would not be against the websites of offshore brokers, whom the regulator already often tries to warn against and in some instances block, but rather against licensed brokers from other EU countries which have been using the MiFID EU cross-country license passport. The passporting system allows brokers (and other financial institutions) to be licensed in one country (typically their home country), and then “passport” that license and provide services in all other EU jurisdictions.

EU license passport – is it going away?

In the Forex and CFD realm, the majority of EU based brokers are domiciled in Cyprus and licensed by CySEC, and in the UK with an FCA license. EU-UK license passorting, however, is going away as of December 31 of this year once the Brexit transition period is over. Passporting among EU member countries (excluding the now Brexited-UK) will remain. Or will it, at least in its current form?

FNG has viewed a strategic document issued by CNMV as part of its 2019 strategic review, stating that it has set up a committee under the direction of Chairman Sebastián Albella to look at the practices of many of these (licensed) foreign brokers offering services to Spanish traders.

The regulator is looking mainly at Cyprus based CFD brokers, and what the CNMV feels are overly aggressive tactics and practices. Overall, Spain has about 200 domestic licensed financial institutions, while about 3,500 EU “passporting” firms – mainly foreign FX and CFD brokers – have received permission to service clients in Spain.

The regulator said it is looking in particular at brokers which seem to habitually engage in the following practices:

  • Encouraging Retail clients to register as Professional clients. This allows the brokers to afford these “Professional” clients more leeway, and in particular more leverage.
  • Encouraging clients to transfer their accounts to related offshore entities. Since the ESMA-led reforms of 2018, many licensed EU brokers have set up offshore subsidiaries operating under the same brand. The brokers then wave their EU license at clients to assure them that the broker is “solid” and respectable, but encourage the client to formally open their account with the broker’s offshore entity. That way the broker can use acquisition and retention tactics illegal in the EU such as offering deposit bonuses or trading volume bonuses. It also allows the client to use more leverage than in the EU. And as an added benefit, it allows the broker to not have to hold capital against the client’s account balance, as required in the EU.
  • Misleading Advertising, such as zero commissions and fees, when in fact the commissions and fees are disguised in other transaction costs.
  • Affiliate Programs, whereby fiduciaries are incentivized to encourage their clients to churn their accounts and trade high volumes.

At this point, the CNMV said it will monitor closely a number of specific firms as well as the overall practices of foreign brokers operating physically or virtually on Spanish soil. However it did note that it is considering specific action which could include the banning of large numbers of foreign brokers.

Were CNMV to take such action, it certainly would not be unprecedented. We have reported that twice in recent months the UK regulator The FCA has taken action and banned seven Cyprus based brokers from operating in the UK. For its part, The FCA noted at the time some questionable practices being used by some of these brokers, such as the use of unauthorised celebrity endorsements on social media, and pressuring of clients into making trades.