Horse(meat) Trading
In January 2013 a House of Parliament Select Committee reported traces of horse meat in lasagnes sold by several major supermarkets. It transpired that animals slaughtered in a Romanian abattoir were not properly accounted for and, owing to a lack of oversight combined with commercial incentive, UK consumers found themselves on the wrong side of a variation so often seen in European standards. This serves as a useful parallel in explaining the emerging market in social trading. Substitute the Romanian food standards agency with the Cypriot financial regulator (CySec), and lasagnes for ‘copy me’ and FX trading platforms and you get a flavour of where things are going wrong.
Many retail and social trading platforms operate from Cyprus and then passport their services to other European jurisdictions through MiFID (an arrangement known as “regulatory arbitrage” in compliance lingo). These platforms use CySec because it offers a “light-touch” regulatory environment which makes it easier to get permissions and thereafter cheaper to run a business. Yet operating from Cyprus is cheaper precisely because there are fewer rules and client protections. The consequence for UK consumers are not merely academic. UK clients that sign up to a platform regulated in Cyprus lose access to the Financial Ombudsman (FOS). FOS resolves disputes between operators and traders and has acquired a fearsome reputation over the years for standing up for UK consumers.
Passporting services from Cyprus to other stricter EU countries is common, but it is by no means the most insidious arrangement in place. The largest and most high profile of the “copy me/social” platforms, on-board’s UK clients through a UK regulated entity. However, the UK entity only operates as a “matched principal” so all trades are passed to a counterparty. No points for guessing who the counterparty is; a subsidiary of the same company, based in none other than …. you guessed it — Cyprus! This mechanism allows clients to be signed up under terms whereby client funds (your money) can be used as collateral to finance their business. Using client money in this way is rightfully outlawed in the UK.
Yet another abuse of the MiFID passporting arrangement is to use a Cyprus based entity as a back-up. This allowed one of the fastest growing trading platforms of recent times to continue to on-board clients after the FCA issued a ‘cease and desist’ order for systematically failing to undertake appropriate anti-money-laundering checks. The company then cheerily informed shareholders in an RNS news release not to worry because they would instead use their Cypriot based entity.
Many horse lovers that now wish they checked their lasagne packaging more thoroughly will advise UK traders to read the small print when signing up to any platform. For the avoidance of doubt, Pelican is a global product based and regulated by the FCA in London.
