Adapting to a new environment: How should brokers respond to the new regulations?
The new ESMA regulations could change the industry as we know it, but how should brokers react to them? Read these useful guidelines to keep up with the trade shifts.
In March, the European Securities and Markets Authority (ESMA) took measures to protect retail investors. These new regulations aim to make the industry a safer place for traders. The greatest change is the new leverage limit on CFDs sales to retail traders. Under the new measures, CFD leverage was limited to 30:1 for major currency pairs, 20:1 for non-major pairs, major indices, and Gold, 10:1 for other commodities, 5:1 for individual equities, and 2:1 for Cryptocurrencies.
As if to emphasize ESMA’s point, Google has issued a series of ad bans on CFDs and Binary Options in March. Now only licensed brokers can advertise CFD and FX online.
Will these changes benefit the industry?
The ESMA regulator has made it clear that the move is geared towards protecting investors. This was contained in a statement by the body’s chair, Steven Maijoor: “The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors.” The regulator’s focus on traders is understandable, however, brokers need to respond appropriately to minimize any adverse consequences these can have on their business and livelihood.
Some have expressed their dismay over the alterations. For traders, the major setback are the intense restrictions on allowed leverage. Some have argued that these changes are unnecessary and that ESMA, like any regulating body, comes up with new regulations not out of their necessity but to justify its own existence. Still, others feel that although small operators will probably take a hit, these regulations will benefit all in the long run. And both traders and brokers seem to agree that the long-term outcome will depend on the reaction of the EU consumer, and how things pan out in the near future.
When a door closes, another one opens
Though the tight regulations signal impending losses for some, it may also open up unexplored opportunities. The transparency and protective guidelines may encourage cautious traders to join the trading business. It will make them feel like they have adequate protection that some feel has been lacking until now.
These regulations could also kick out “scam brokers” who are ripping off clients and wrecking the industry. Unethical players will soon have no place in the game. The downside is that offshore traders who are not regulated by these changes, could still attract investors with bonuses and possibilities of up to 1:100 leverage.
Adapting to the new rules
The changes in Google’s policy urge brokers to be more creative with marketing. Google did not release a total ban on CFD and FX ads, but you do have to comply with the requirements. Play by the rules to stay away from fines or account bans.
The ad restrictions will limit your marketing reach, so leverage on other strategies. Attract new clients with inbound marketing, PR, and native advertising. Ingenious brand positioning is crucial for broker success in 2018 and beyond.
One of the guidelines of ESMA revolves around transparency. It is not enough that you have a visible risk warning. The new rules state that you have to reveal the actual percentage of losses that a client can have per trade.
Brokers need to adapt to the changes to stay relevant. Re-evaluate your strategies and change what’s modifiable, so that you can still be profitable. The market, as well as the regulations on it, have been evolving and will continue to evolve. Those who are willing to adapt will thrive.