Marek Wołos, IDM: "ESMA's intervention may have the opposite effect to that assumed"

ESMA, ESMA, ESMA. It strikes the entire Forex industry, like RODO marketing companies. The changes are coming and it is already a fact. But there are still a lot of ambiguities, doubts and unknowns, especially when it comes to the future of the industry as well as the traders themselves.

We talked about the upcoming changes with Marek Wołos, OTC expert of the Chamber of Brokerage Houses.

Read absolutely: Forex lever: Do you really need high leverage? [Column]

Forex Club: What will change on the market after 1 in August this year?

Marek Wołos: The main changes introduced as part of ESMA's intervention relate to the amount of the required security deposit, the unification of all investment companies to stop the 50 percentage, introduction of protection against negative balances, restrictions on the bonuses offered when concluding transactions on CFDs and unification of the risk warning. 

In practice, from 1 August 2018, investors will have to have much more money in their account to rotate the same amounts as now, thus the forex may become less attractive for them. In the case of currency pairs in which there is zloty, we mention the need to raise the value of the deposit up to five times. Similarly, in the case of investments in the most popular stock market indices or gold. So far, a few thousand zlotys was enough to make it  invest and be able to count on a large return on investment. Now, this amount will be insufficient. Regulations introduced in this form create a risk of regulatory arbitrage with a loss for the domestic brokerage industry. In connection with product intervention, the European market will become attractive to non-EU companies that will not comply with ESMA regulations.

FC: How did investors react to the legal provisions proposed by ESMA?

MW: During the consultations conducted by ESMA, 18 entities expressed their opinions, including exchanges and brokers from the CFD and binary options sector, consumer representatives and private individuals. ESMA did not publish the results of the responses related to the proposed changes. 

Independently, the British company IG Markets has conducted research on the proposed new regulations. 14 entities submitted their responses. The published analysis shows that 600% of the respondents did not agree with the proposed changes. For experienced investors, the market will lose its attractiveness. Nearly 98% of responses indicated that after the introduction of the leverage limitation in Europe, investors will consider switching to an entity that is not registered in the EU. Additionally, it can be expected, as examples from other markets show, that this will encourage many people to become interested in the much riskier cryptocurrency market. The introduction of an intervention may therefore have the opposite effect to that assumed. Instead of increasing the safety of investors, we encourage them to transfer their accounts to companies that operate in the EU and are not subject to any supervision. 

FC: What is IDM's position on the changes proposed by ESMA?

MW: The brokerage industry in Poland has previously negatively assessed the legal changes proposed by ESMA, indicating that the actions taken do not address the real challenges and needs of individual investors on the CFD product market, and thus do not directly lead to increased investment security and customer protection. IDM has already informed the Ministry of Finance and the Polish Financial Supervision Authority many times that the introduced regulatory restrictions of ESMA will also contribute to lowering the competitiveness of EU companies and inhibit their development, marginalizing their importance on the international stage. The Chamber emphasized that such regulations created a risk of regulatory arbitrage at a loss for the domestic brokerage industry. 

Due to the intervention of ESMA, the European market, including the domestic one, will become attractive to companies from outside the EU that do not comply with ESMA's product intervention regulations. These entities, through intensified online advertising campaigns, will offer retail clients competitive transaction conditions on the OTC market, encouraging them to take advantage of their services and transfer their accounts there. The first such entities offering better investment conditions, i.e. a leverage of 1: 200 or even 1: 400, are already appearing on the domestic market. Such actions probably do not comply with EU and national law. 

FC: How will the regulations affect the forex market in Europe? Is the migration of traders to brokers from outside the EU not a problem for the entire industry?

MW: Leverage is an important criterion for choosing an offer by a retail client. A conscious investor uses a lever to maximize its potential profit. The introduction of such restrictive restrictions by ESMA will make retail customers look for alternative investment opportunities. The intervention may have the opposite effect to the assumed one. Investors will start transferring their bills to companies that operate within the EU, and are not subject to any supervision. You can expect in the near future adverts of this type of companies, providing quick and easy profit, as was the case when introducing restrictive regulations in Belgium or Turkey. The Belgian regulator, after the reform, placed on the list of warnings close to 100 illegally operating companies.

The restrictions introduced by EMSA regulated the activities of European entities, but no one has considered what is outside the European Union. This approach reduces the investment attractiveness of the European market to the benefit of non-ESMA jurisdictions whose activities are currently the greatest challenge for supervisors. Most complaints and complaints from individual investors regarding non-EU companies. Their activity is currently the biggest problem on the forex market, because it is here that we most often deal with fraud. IN  the latest draft law on the supervision of the financial market developed by the Ministry of Finance, a proposal to block the websites of such entities has appeared. However, this idea is not effective - illegal pseudo-investment companies deal with it effectively by registering twin domains. For today, we are helpless against foreign companies operating on the European Union market. We do not have tools that would allow us to fight such entities, which certainly does not improve the security of customers on the CFD market.

FC: Does IDM think the three-month transition period will be extended or approved permanently?

MW: The extremely hasty consultation process carried out by ESMA earlier this year suggests that not all of the dozen or so thousands of surveys sent in this process have received due attention from the regulator. It certainly does not build trust in the new product intervention procedure. ESMA should serve the development of the market, and the introduction of regulations in this form in the formula of 3-monthly intervention, may cause investors to flee to companies from outside the EU. 

FC: Some of the brokers have launched campaigns offering traders the possibility to change their classification to "professional client". There are 2 out of 3 conditions to be met that can open the way to higher leverage. Has the regulator provided for an effective and uniform verification method for all applicants for the said change?

MW: All European Union countries are obliged to apply the MiFID II directive. The regulations contained in the document define what must be done to become a professional client. In order to change qualifications, two of the following three conditions must be met: enter into transactions of significant value, i.e. approx. euro in the financial instruments market, at least 50 times a quarter during the last year; have an investment portfolio of the equivalent  minimum 500 thousand euro or work (currently or in the past) in the financial sector in a position that requires knowledge of transactions in financial instruments and brokerage services for at least a year. 

FC: In what direction should legal changes go in order to best protect individual clients?

MW: The legal changes should, above all, favor the development of the domestic brokerage industry. Regulations are necessary that will eliminate entities that abuse the market and damage its credibility, and will strengthen investors' trust in Polish brokerage houses. We hope that public authorities will take appropriate steps to eliminate abuses by non-EU companies operating on the Polish market. We hope that with the use of appropriate legal and control tools, the state will create legal solutions that will allow European companies to maintain a competitive advantage and provide further conditions for development for the domestic brokerage industry.

Thank you for the interview!