FCA gearing up regulatory efforts after major headline year in 2015

The regulators are our friends, or so we are continually told, but their efforts are often constricted by budget limitations or thwarted by the antics of well-capitalized crime rings. In other words, they have to make the most of their resources, one reason why they tend to grab financial headlines whenever the press is more than willing to entertain them. As we witnessed in 2015, the Financial Conduct Authority (FCA) in the UK is no shrinking violet. They attacked major banking institutions with billions in fines for rate-setting atrocities and then concluded the year by blocking forex industry consolidation attempts.

Prominent headlines, however, can be double-edged swords at times. On the one hand, they can inform the public that their confidence is well placed in their government law enforcement agencies to protect them at all costs. On the other hand, however, they can prove to be embarrassing, especially when it comes to light that major fraud schemes were actually operating for years without the slightest of detection. Well-placed headlines can also serve to scare their intended targets to think twice before acting in a fraudulent manner, a tactic that has been used so frequently, one almost wonders whether it is useful anymore.

If 2015 was a halcyon year, then 2016, as far as the FCA is concerned, is already developing into another banner period for this regulatory body. They have greeted the first two months with all guns blazing, first attacking “firms selling so-called “contracts for difference” (CFDs) such as spread bets and “rolling spot” forex.” They have also warned consumers about potential “clone” websites, the latest high-tech scheme deployed by cyber-crooks, and issued a host of new rules for high-frequency trading brokers that rely on algorithm software to beat the market.

There is also good news related to customer deposit recoveries. In 2015, there was an avalanche of reports that Ponzi schemes were alive and well. In a recent news report, one criminally inclined forex hedge fund operator was found to have over £2.5 million in illicit funds residing in his personal bank account. Recoveries are rarely this easy and usually require great lengths of time and effort to ferret them out from foreign hiding places, but, occasionally, crooks do slip up. The law of averages can catch up with them.

The FCA is stepping up its game due to crime expansion and market conditions

The forex industry, like any other business sector, is highly dependent upon the market environment. As conditions change, the criminal element must also adjust its approach or adapt existing schemes to new targets of opportunity. The changing nature of environmental conditions can be summarized by the letters “EVRN”, which stand for the economy, volatility, regulations, and network. The nature of each element can also cause fraud to increase or decline, requiring consumers to be more wary, as well.

In the first place, the global economy has been in decline for nearly five years, driven primarily by tepid growth in North America and Europe. The high-flying “BRIC” countries were forced to cool their respective economic engines, especially China, thereby driving more declines in the commodity sectors across the planet. Add in central bank market manipulation, and you have more cause for despair. When things get tight, margins get thinner for forex brokers and for the crooks that abuse the system. Recovery from the 2008 banking debacle has been slow, and analysts are concerned that a reversal is imminent. Fear has a way of encouraging unruly business practices. Be aware.

In the foreign exchange world, volatility is the key driver for profitability among brokers and among thieves. Volatility in currency trading hit rock bottom for a long period of time in 2014, and declines near the end of 2015 and at the outset of 2016 have been strangely reminiscent of that time of volume declines. Our industry is also plagued by high casualty rates, forcing marketing efforts to get more strident when times get tough. Low volatility only puts more pressure on the need to find new customers, and fraudsters can easily hide behind aggressive promotional campaigns that seem too good to be true.

Since the nineties, regulators have focused on putting bogus brokers out of business and behind bars. Since the Great Recession, the focus has shifted to the issuance of protective regulations, designed to ensure capital adequacy and a higher standard of performance. As a result, many non-compliant brokers have been forced to consolidate with other entities or drastically improve their operating procedures to satisfy regulators. The banking crisis in Cyprus also proved that risk outside of forex world could harm the industry, as well. Stiffer new regulations ensured that CySEC was on par with the FCA.

Lastly, the network of the foreign exchange industry includes many participants, each having to adapt to the economy, volatility, and regulations. Retail forex trading, however, is primarily an online affair. As the Internet has grown and new technology has come and gone, cyber related crime has accelerated well beyond the capabilities of present day law enforcement agencies. Clone websites, aggressive email and call campaigns, and questionable rate reporting practices are becoming more prevalent. Most attacks center around personal identity data theft. One in four people were impacted in 2015.

What FCA actions are already garnering headlines in 2016?

The FCA has already put together a highlight film worthy of publication in only the first two months of this year. Their actions to date in the forex arena have focused on three areas: warning consumers of potentially fraudulent business practices; requiring improvements in operating processes, and recovering customer losses in the forex sector. Here is a brief recap of each initiative:

FCA Initiative #1: Potential Fraud Warnings

Cyber crime is on a rampage, and the foreign exchange industry is not immune from its nasty consequences. The FCA has issued many releases related to unregistered firms soliciting UK residents from offshore for retail forex or digital option trading. These solicitations can take the form of emails or advertised links on the Internet. The most insidious form, however, comes from aggressive telemarketers that goad customers into depositing funds online immediately in order to take advantage of one-time promotional bonuses. The first call is usually followed by a second to encourage an increase in account balances, all designed as part of a larger fraudulent operating business model to defraud.

Another prevalent con game is to create a “look-alike” or “clone” website, patterned after a successful broker. The latest warning involves a FCA registered firm, Capital Markets Trading. The “clone” calls itself MarketsCT, and also claims to have the same address, 175 Piccadilly, London W1J 9EN, as the legitimate company. The clone has been actively targeting investors in the European region with what the FCA calls a “falsified product suite.” Even though the clone claims to have financial ties to the real Capital Markets Trading group, the FCA warns that this statement is fraudulent and that the firm should be avoided.

FCA Initiative #2: Performance Improvements

The banking sector has come under a great deal of scrutiny due to flagrant rate-fixing processes in forex and other security arenas. In an effort to shore up activities across banks, building societies, and Prudential Regulation Authority (PRA) designated investment firms, the FCA issued an updated set of rules to strengthen individual accountability across algorithmic and high-frequency trading firms.

Tracey McDermott, the acting Chief Executive at the FCA, announced that, “We are determined to embed a culture of personal responsibility within the banking sector. Clear individual accountability should focus minds, drive up standards, and make firms easier to run and to supervise.”

In a related action, the FCA also sent a warning shot across the bow of CFD and spread-betting providers that they had better clean up their respective acts. As if the Plus500 Fiasco in 2015 was not enough to spur compliance, the agency sent a letter to CEOs across the industry warning that anti-money laundering procedures were lax, consumer warnings were insufficient, and overall results of prior compliance audits were generally poor across the board.

According to Megan Butler, FCA director of supervision and author of the letter, “These findings also suggest that firms may not be acting in the best interests of their clients and treating them fairly. We also saw evidence of poorly worded risk warnings that did not set out the nature and risks of CFD products in a manner that was clear, fair and not misleading.”

FCA Initiative #3: Customer Loss Recoveries in the Forex Space

Since the Great Recession, Ponzi schemes have taken on a new dimension, keeping lower profiles, rather than strive for billion Pound payoffs. One case in point was Alex Hope, a former Wembley Stadium catering manager turned forex trader extraordinaire, who had bilked investors out of £5.6 million, posing as a foreign exchange hedge fund manager. Less than 10% of these funds were ever returned to investors in an obvious Ponzi scheme designed to defraud. His trial commenced in late 2014, and he was sentenced to seven years in January 2015.

Court papers revealed that Hope had funded his extravagant lifestyle with most of the missing funds: “Alex Hope boasted he was a financial whiz-kid while swindling unsuspecting investors out of £5 million to fund a flashy playboy lifestyle. The fraudster blew vast sums in casinos, hotels, shopping sprees and clubs around the world in a ‘hedonistic’ £2 million binge.” Upon further investigation, FCA investigators found nearly £2.5 million in Hope’s personal bank accounts. As a result, investors will recover nearly £2.9 million, a rarity, since in most cases of this type, whatever funds are recovered are usually sufficient only to pay court fines and costs. According to the FCA, “This is the largest sum ever returned to victims of crime by the regulator following a prosecution.”

Concluding Remarks

The FCA was out for blood in 2015, and, by the looks of 2016, it is continuing to build upon the momentum and successes of the prior year. It, along with the combined efforts of CySEC and the CFTC, is determined to return peace of mind to the foreign exchange industry that in recent years has been rocked by rate-fixing scandals at the highest level of banking, fraudulent business practices at lower levels, and cyber crime across the board. At the end of the day, the regulators are our friends. Report problems when you encounter them. Heed their advice and warnings, and always remain skeptical. In the long run, ongoing due diligence, aided by a skeptical mind, has its own true rewards.

Chris Lee

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