Getting the Message Right: Advertising Compliance for Brokers

Advertising Compliance for Brokers

The latest incident where CySEC fined iForex has turned our attention to the topic of the advertising requirements imposed by regulators, to which brokers have to comply. In the case in question, the regulator CySEC, operates within the European Union’s Markets in Financial Instruments Directive (MiFID), which constitutes the framework governing the regulation of all financial instruments in all the countries belonging to the European Economic Area. One of the requirements contained in the MiFID is that when advertising their financial products to private, retail investors, all regulated firms are obliged to comply with certain specific standards, which attempt to ensure that potential customers are fully aware of the risks involved in trading and investing. Clearly, through the MiFID and the existence of advertising standards the attention is on protecting the rights of customers.

However, the MiFID does not go to the full extent of completely harmonizing and streamlining the requirements across all the European Economic Area countries. What it does in reality is set out the minimum standards that need to be meet, tasking the domestic regulator in each country with the job of implementing and enforcing these minimum standards. These in practice means that in each country the domestic regulator may opt to adopt a harder and stricter stance on such issues, resulting in slight or greater variations in what exactly is required in terms of advertising rules from country to country.

Nevertheless, the general rule is that all regulated forex and binary options brokerage firms need to safeguard that all the advertising materials they use, in whatever form, clearly disclose to potential clients the risks involved with trading forex, binary options or any other instrument they are promoting. It is understood that the rules include mailers, web content and advertising banners, the absence of a risk disclaimer from iForex’s banners being the primary reason why it was recently fined. Beyond the display of clear and adequate risk disclaimers, brokerage firms are also obliged to ensure that clients can easily identify exactly who the advertising is from, especially when it comes to mailers.

The administrative compliance framework is not only strict in Europe where the MiFID is in force, but also in the US, where the NFA is also known to be taking a hard stance on such issues. As the regulation of online brokerages becomes more effective and efficient, brokers need to be much more careful with regards to their communication with the public and are in danger of penalties in case such communication is not clear or not balanced. The question of balance is important, as brokers tend to over-emphasize the potential for profits and under-emphasize the potential for losses, in their quest to lure customers in investing through them. Besides the rules governing the electronic and printed advertising materials of brokers, it is also worth mentioning that certain regulatory authorities also demand that brokerages audio-record all the conversations between their staff and clients, and keep these audio recordings safe and accessible for future reference, in the interest of transparency and in order to resolve any disputes that might arise.