To Be Or Not To Be... A Regulated Broker
Published 24th June 2015
The dotcome bubble of the late 1990s was an era when every aspiring entrepreneur would transform into an Internet extraordinaire, and dot.com businesses with three-digits P/E valuations sprung up apparently overnight. Fifteen or so years later, and history is repeating itself, with the online businesses and IPOs having a distinct financial flavour this time around. Instead of hi-tech wannabe entrepreneurs, today’s world is flooded with wannabe online broker financial gurus with a penchant for the use of Artificial Intelligence and algorithmic search engine marketing. The vast majority of the striving FOREX and Binary Options Online Brokers on their way to an IPO (“OBIPOs”) can also trace their entrepreneurial roots to the online gaming industry of the late 1990s and early 2000s, and armed with high octane knowledge on how to market and attract ‘players’, have sought to conquer the world of online finance and extrapolate their skills to the wider spectrum of the ‘retail investors’. Had the population of a planet in the far corner of the Milky Way been invited to take up residence on Earth, it is my distinct feeling that such a migration would have gone much more smoothly than the attempts of gamers to integrate into the world of online finance and compliance. The marketing success of the OBIPOs was unparalleled as ‘players’ were limited to x% of the population whilst investors and wannabe traders, via the comfort and easy access of mobile apps, were not a mere subset of the population but the global population itself. Every rose has its thorn however, and the thorn in our story is the R-word… regulation…a word with the power to send a shiver of fear up the spine of every OBIPO, given its utter disregard for size of broker, volume or marketing capabilities. The R-word’s side effects was the introduction of words like compliance, internal audit, risk management, capital adequacy reporting, reconciliations, safeguarding and. to make matters worse, this three-letter acronym that has brought down governments and empires…AML (Anti Money Laundering). The nemesis of every banker, asset manager, broker, gamer and service provider of any regulated entity.
The R-word not only expanded the vocabulary of the OBIPOs into unchartered territory but created a confusion of massive proportions. If the brokers know what is best for their enterprise and how to spend their resources, why should some regulator, who arguably wouldn’t be able to master a job working in their industry, have a say on how they should go about their business? Furthermore, the OPIBOs’ interpretation of compliance versus the regulators’ was diametrically opposed. Whilst a scanned copy of a passport was sufficient for the OBIPOs to grant full AML compliance, the regulator would want notarized and certified copies or originals of an endless list of documents, economic profile construction, activity description, inflows, outflows. In other words, a never-ending list. And even worse, there is this thing called ongoing Know Your Client and AML monitoring. So the OBIPOs were faced with the dilemma… grow as an unregulated broker that would assimilate the sprint of an unleashed stallion on the prairie, or stay confined in the solitary prison of regulation and a world of don’ts and can’ts. Given the life expectancy of the vast majority of OBIPOs is estimated to be three years at best in the current environment of intense competition and regulatory bombardment, it is a wholly sensible strategy to conceive of risking it on the unregulated side in the early stages, grow a cash pile and then consider regulation when there are no other regulatory wrongs left to commit, like visiting a temple to abolish ones’ sins after you have committed murder, but only after you have made a healthy profit out of it, a profit you intend to keep. Readers may sense that I am exaggerating the case to make a point, but the scenario painted above is not far from the reality, I kid you not. Online brokers originating from an unregulated environment, where dormant clients’ cash was widely considered a limitless pool for marketing expenditure, could only anecdotally follow regulations and respect the financial regulatory authorities’ procedures.
The regulation tide however has turned and it is stimulating a tsunami of change and regulatory obedience across the industry, given recent and not-so-recent events involving companies such as CWM, Plus 500, Iron FX, MF Global and many others. A lack of compliant AML procedures and safeguarding of clients’ funds has become a criminal offence, and no longer is an administrative slap-on-thehand-fine going to save the day. Risking it out may mean total annihilation of customer deposits and irreparable damage of your online brand, as recently witnessed first-hand by many OBIPOs. The regulators have ganged up like a supercharged financial NATO, and with brute force have gone about shutting down the businesses of every unregulated broker or regulated broker who dares to misbehave or venture into the unauthorized realms of other jurisdictions. While we should not underestimate the power of the Internet that lies in favour of the OBIPOs, it is equally naïve to disregard the speed and power of the exchange of information between regulators, banks, third-party databases such as World Check, World Compliance, Dow Jones and payment service providers (“PSPs”). Regulation is now no longer a luxury but a necessity of modern times. Competing for ‘investors’ without regulation, a good bank account or a regulated PSP is a potential death by 1,000 cuts for online brokers. Every day that you wake up and build your empire, you could be risking it all by an asset freeze from your bank, the closure of your account by the PSP or VISA or MasterCard, the collapse of your bank or PSP due to a poor credit rating, or a deceitful account opening by your agent. These are just a few of the multitude of adverse possibilities. Regulation should be embraced so that your marketing strategy benefits and it therefore more than counteracts the higher expenses and the restrictions on what you say or how you say it. At the end of the day, your ‘investors’ are not ‘players’, and by treating them as ‘investors’ you can do business with them for years, versus the short-term, adrenalin-fuelled gains from ‘players’. ‘Players’ should be targeted via a traditional gaming approach, whilst ‘investors’ will require investment training and be granted an “investment horizon”. The CPAs and CPLs will also vary between regulated and unregulated brokers, with the former being able to command more competitive prices and the latter living the dream of being an OBIPO via a daily tour of a regulatory minefield.
“Online brokers originating from an unregulated environment, where dormant clients’ cash was widely considered a limitless pool for marketing expenditure, could only anecdotally follow regulations and respect the financial regulatory authorities’ procedures.“
“Regulators have ganged up like a supercharged fi nancial NATO, and with brute force have gone about shutting down the businesses of every unregulated broker or regulated broker who dares to misbehave or venture into the unauthorized realms of other jurisdictions.”