Forex Financial Promotions: Why Being Compliant Matters Now More Than Ever Before?

Every business around the globe needs a solid customer base to ensure its survival. Forex brokers are no exception.

Financial promotions, according to the UK Financial Conduct Authority (FCA), are a communication that contains an invitation or inducement to engage in a financial product or service, which has a significant influence over the financial decisions made by consumers. Such communications can take various forms, including advertisements placed through print, website or broadcast, emails, or social media, etc.

Crossover marketing helps unlock more brand potential.

The financial promotions circle is bustling, with some brokerages racking their brains to build an impressive and refreshing brand image, in order to induce customers to involve in investment activities.

In 2022, the online trading platform Icm.com has furthered its collaboration with the UK non-profit organisation Sands End Associated Projects in Action as part of its corporate social responsibility outreach program. The cause-related marketing approach can help build a reliable corporate image with a sense of social responsibility.

In addition, many brokers choose to promote their brand and services through sponsorship, sports sponsorship in particular, namely Kohle Capital Markets​, Admirals, eToro​, IC Markets, AximTrade​, Vantage, Pepperstone​, among others.

Late 2021, Asian broker GemForex​, has inked a multi-year partnership with the sporting icon David Beckham, who will help to promote GemForex and its services across Asia. And Public.com, a US online brokerage and social trading startup, has partnered with WNBA All-Star, Olympic gold medalist, and Phoenix Mercury guard Skylar Diggins-Smith. As part of the partnership, Diggins-Smith's fans were be offered free stock to start a portfolio on Public.com to start their investing journeys.

New online promotion tactics catch regulators' eyes.

With the boom in digital economy, which was mainly fueled by the Covid-19 pandemic, a host of brokerages are putting more efforts on online financial promotions. Further, online brokers say that engaging with customers through social media would encourage more trading, as investors can more readily access financial information.

And a survey conducted by the Australian Securities and Investment Commission (ASIC) in 2021 showed that 33% of 18 to 21-year-olds followed financial infuencers, also called finfluencers, who give advice on financial investment on social media. 64% of these Gen Z's financial behaviour changed because of a finfluencer. Brands therefore often rope in finfluencers to advertise their products or services.

The rampant nature of investment advice flooding the social media has caught regulators' attention worldwide whose hands are full already.

For instance, the US Securities and Exchange Commission (SEC) reported just last week that since at least January 2020, eight finfluencers defrauded around $100 million​ by manipulating exchange-traded stocks on the social media platforms. The regulator found that these individuals mainly targeted newbies and repeatedly fed them a steady diet of misinformation.

On top of that, quite a few trading apps that introduce gamification techniques come forth, for the purpose of catching the eyes of the young generation.

Some product design features could be contributing to problematic, even gambling-like, investor behaviour, according to Sarah Pritchard, Executive Director of Markets at the FCA.  

Financial watchdogs, including the FCA, the European Securities and Markets Authority (ESMA)  and Cyprus Securities and Exchange Commission (CySEC), are aware of these, and warn that trading apps with game-like elements may prompt consumers to take actions not in their own interest. 

"I believe these are fundamental shifts in how the market works and who engages in the market," said Verena Ross, chair of the ESMA. "I think the downside of some of that is that it entices a lot of speculation, and a kind of gamification of the way retail investors engage in financial markets."

Why does compliance matter?

Regulator require brokers to ensure that financial promotions must be implemented in a clear, fair and not misleading way. Otherwise, they may face heavy fines, and what's worse, risk having their licence revoked.

In October in the US, the internet celerity Kim Kardashian paid $1.26 million in penalties for touting on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion.

Last month, Wells Fargo Securities was fined $200,000​ by the Financial Industry Regulatory Authority (FINRA) for overstating its advertising trading volume on social media campaigns.

ASIC has cancelled the Australian financial service licence of National Advice Solutions​ due to the entity's failure to ensure that financial services covered by the licence were provided efficiently, honestly and fairly. 

Between January and October 2022, the FCA has removed or amended more than 5,000 financial promotions from authorised firms, while this figure of 2021 was just at 564.

Investors, novice traders who are lack of financial literacy in particular, are vulnerable to fraud and misleading information, and likely to trade instruments on a whim that get in over their head and are not appropriate to their own financial circumstances.

Tighter regulations come on the heels.

In light of this, many financial regulators continue setting lights on financial promotions and made new rules and frameworks to complement existing regulatory infrastructure.

Already in 2016, the FCA and CySEC has banned brokers from bonus promotions. CySEC has banned outsourced call centres, and tackled aggressive marketing practices as well. Besides, earlier 2022, the FCA proposed an enhancement of risk warnings on ads and ban on incentives to invest, for example new joiner or refer-a-friend bonuses. 

Regarding the emerging promotion tactics mentioned above, the Australian watchdog would sentence finfluencers without a license to jail for up to five years. In India, finfluencers could face a fine of ₹10 lakh if they fail to disclose brand associations under the new guidelines that are released in December.

Besides, Germany's financial watchdog BaFin proposed to prohibit sale of futures products to retail investors. Australia has extended the ban on the issue and distribution of binary options until October, 2023. Besides, the instruments are banned in the UK, European Union, Isreal, among others. Whereas, they are legal in the US.

Further, in the UK, any FCA authorised firm will need to undergo new screening checks​ before they are allowed to approve financial promotions. Under current legislation, they are allowed to approve financial promotions on behalf of other firms who are not authorised by the FCA.

Wrap-up

The financial promotions marketplace, especially the online channel, is now flooded with clutter, which is becoming a concern for global regulators.

No rules, no an orderly and trustworthy investment atmosphere. Financial watchdogs are exploring certain minimum promotion standards for brokers to both protect retail traders' vital interests and help them to make well-informed decisions.

For customers' sake, and for their own as well, brokers must constantly review their promotion activities to ensure they are in compliance.