How do Changes in FCA Regulation Impact Forex Brokers?

How do Changes in FCA Regulation Impact Forex Brokers?

Regulation is important for traders because it’s an added layer of protection for you.  But there has been a number of changes in regulations recently by not just CySEC but also another major regulatory body, Financial Conduct Authority (FCA).

How do Changes in FCA Regulation Impact Forex Brokers?

When 2016 was ending, both FCA and CySEC sent out circulars informing brokers of changes to their regulation which were meant at combatting a majority of the issues which have affected traders over the past couple years.

One of these major changes is the ban on bonuses. While bonuses are a great way for you to gain an increase in trading capital, many brokers have been using them to trick traders like yourself into committing to meeting ridiculously high trading volumes among other things.

Another reason is the fact that many brokers have been using bonuses as a means to compete without actually improving trading volume. This has resulted in numerous traders signing up with brokers because of attractive bonuses without taking a look at the actual conditions of the bonuses or overall trading conditions. This has caused many traders suffer major losses.

All of these results of the improper use of bonuses has prompted the FCA to put a ban on them. What this does is force brokers to focus on improving trading conditions without relying heavily on bonuses as a means of competing with each other. However, this will affect many brokers, especially the smaller ones, which use bonuses as an integral part of their marketing strategy. And no doubt will traders be affected too.

Another major change in regulation is the restriction on leverages for CFDs. Because FCA’s research has shown that many clients are opening more accounts and trading CFD products that they do not understand and therefore losing. FCA is proposing that leveraging be restricted for more inexperienced clients who do not have 12 months of active trading.

FCA is proposing that brokers cap the leverage at 25:1 for the seriously inexperienced traders. It is also proposing that leverage is capped at 50:1 for all retail clients and that the leverages offered for assets be lowered according to their risks.

All of this is due to the major losses which clients have experienced over the past couple year due to high levels of leverage. For many brokers, the level of leverage well exceeds 200:1 and FCA are proposing lowering the leverage to reduce the losses suffered by clients especially the more inexperienced ones.

One more change which is proposed by FCA which while not as significant as the other two is the introduction of standardized risk warnings and the display of profit-loss ratios of products on all client accounts by all brokers.

These changes are quite significant and will no doubt impact the business of all forex brokers. While there are representatives from some brokers which believe this will only benefit brokers and forex trading on a whole, in the long run, there is no doubt there are some who do not agree.

With a cap on leverage and a ban on bonuses, many brokers have lost major marketing ability and will undoubtedly lose clients. Only time will tell how many forex brokers adapt to these changes but there’s no doubt that many traders, especially beginner traders, will benefit from these changes.

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