The following is a guest report from the team at Forextraders.com discussing recent credit card bans by the NFA and what this means for retail forex.
On January 18, 2013 the National Futures Association (“NFA”) issued a “Request for Comments” letter in which the group proposed a ban on the forex brokerage practice of offering “retail forex customers the opportunity to fund their accounts directly using a credit card or indirectly using a credit card via an alternative funding mechanism (e.g., PayPal).” They go on to state that they are “concerned that retail customers may be opening accounts with funds that are not risk capital and are using credit cards as a source for borrowing funds to invest.”
Industry insiders are seeing this move as one more attempt to attack independent forex brokers in the United States, following the passage of Dodd-Frank legislation some years back. The retail forex industry has grown leaps and bounds during the past decade, and it has had its share of growing pains. The Commodity Futures Trading Commission (“CFTC”), the regulator for currency trading, and the NFA, the overseer of the U.S. futures industry, have each performed a yeoman’s task in cleaning up rampant fraud and educating consumers on the risks they were undertaking in foreign exchange.
Despite a host of restrictions placed on domestic brokers and the enforcement of new capital standards, these two regulatory bodies keep adding fuel to the brewing fires developing in our nascent industry. If the intent is to force consolidation of outliers or push domestic customers offshore, a more risky proposition from a client perspective, then the two agencies are surely succeeding at their task. Foreign competition has always been a threat due to outrageous marketing offers and promises of leverage levels that are multiples of our legal limits, but recent actions serve no purpose but to hand over jobs and business to firms headquartered beyond our borders.
What is the timetable for implementation of these new rules? When a “Request for Comments” letter is issued, there is typically a period of time for potentially impacted stakeholders to reply, followed by a public meeting. Time periods are not fixed, but depending on the responses and deliberation, three to six months is not uncommon.
Will the NFA withdraw its proposal? Industry insiders have been canvassed and expect these rules to become law without much revision. The impacts, however, are debatable. While the practice is promoted actively, this marketing effort is designed to gain initial interest from potential customers at a low level, typically as low as $100. The process is convenient, and a majority of deposits do flow into accounts utilizing this method. It was never intended for larger transfers, where debit cards or wire transfers are the rule. The NFA obviously prefers risk capital to exist as cash in a liquid account, not borrowed funds.
Industry insiders also admit that small balance accounts, those below $2,000 in value, tend to suffer higher casualty rates than their larger account brethren. Time is a crucial factor in currency trading, and if the return is not large enough to justify the amount of time invested, then the trader generally resorts to imprudent lot and leverage sizes, hoping to win big, as if gambling in a legal casino. These tactics are a recipe for failure and give the industry a tarnished image that only draws more criticism from regulators.
What is the answer? FX Solutions has already added “asterisks” on its funding page to qualify how clients may deposit funds, in line with these new suggested “best practices.” Marketing departments will most likely shift their focus to converting existing traders, rather than seek true beginners. As for traders, more due diligence will be required when choosing a business partner. (To find the forex broker that suits you the best, view Forextraders.com’s broker review page.)
Survival of the fittest best describes the latest evolutionary trend for retail forex brokers.
New rules like this is all a part of regulating the Forex market in order to ensure fair and ethical business between parties. It makes trading less one-sided, and forces risk management to be put in the forefront of clients minds to help protect them. We would always recommend that you choose a broker that is certified by a regulatory body.