Is Regulation Killing the Forex Industry?

The Forex industry has changed dramatically over the last two decades. What was once the preserve of large financial instructions and professional forex traders only, was opened up to the masses through a combination of advancing technology and deregulated markets.

The number of online forex brokerages increased exponentially and with that brought issues regarding regulation. This was brought home by the rise of Binary Options trading offering free demo accounts to lure in customers and the number of unregulated brokers practicing in a less than ethical manner. After a series a high profile binary options and forex fraud cases, the EU imposed new regulation via the European Securities and Markets Authority (ESMA). It provided a revamp of the existing Markets in Financial Instruments Directive (MiFID) which tightened up regulation, increased compliance measures and provided more protection to the consumer.

Fast forward to 2019 and it seems most regulated forex brokers are in a struggle to remain profitable in the current climate. The regulatory push seen in Europe, China, and now Australia is squeezing the forex industry that is worth somewhere between $3 – 4 trillion dollars every single day.  The tightening of regulations in the EU has forced brokers to look offshore for clients from geographies outside of Europe. The problem is that regulation is catching up globally and there are increased banking, payment processing and marketing restrictions. With this in mind, offshoring could be viewed as a short term action. As we are seeing in Australia, regarded as a ‘safe-haven’ for brokers for years, the change in regulation, is having a noticeable impact upon forex brokers globally.

So, is the forex market over-regulated? Well, an important factor often overlooked is the fact that volatility has been down over the last 18 months. It’s not that trading has become boring or unprofitable, it’s just that the market conditions are not favourable for higher volume trading. Another important factor is that the frauds, the scams and the bad practices of a few years have made the public wary of online trading. It seemed there wasn’t a week that went by without a forex fraud making the investing news. Many fingers were burnt by disreputable brokers and the reluctance to get back in the game is evident.  The general malaise towards forex trading has been heightened by the marketing restrictions imposed by regulations.

Overall, the regulation was badly needed. The retail forex market was killing itself with bad ethics, poor planning and too many ‘rogue’ brokers. Many smaller brokerages disappeared, and more are closing all the time. The clean-up process is ongoing and without long-term planning and investment into the compliance and on-boarding processes, the retail forex industry will continue to struggle.