The Importance of Consumer Protection in Forex Regulations

While the forex market may be a vast global entity that has a total value of $1.934 quadrillion (that’s around 2.5-times larger than the world’s GDP in case you were wondering), it’s fair to say that this entity has a chequered history in terms of fraud and mis-management.

Make no mistake; the forex market has certainly seen its reputation tarnished globally by a number infamous scams and episodes of illegal activity, with a number of the world’s leading banks having faced significant fiscal sanctions as a result.

However, this shouldn’t distract from the efforts that have been made to help create new and more stringent regulatory regimes, even in emerging economies such as South Africa. But how have these measures improved consumer protections, and why should you care as a trader?

The New Regulatory Framework – How South Africa is Leading the Charge?

Of course, forex trading in an inherently volatile and risk-laden entity, which is why brokerage sites are fundamentally designed to minimise risk and market exposure

However, this alone has proved not enough to safeguard investors, particularly with over-the-counter derivatives such as currency having been largely unregulated in regions such as South Africa throughout history.

This was until recently, however, when new regulations were formulated and introduced by the Financial Sector Conduct Authority (FSCA) under the auspices of the Financial Markets Act, 2012.

Rolled out in earnest in 2018, the FSCA’s new regulations have ensured that all OTC derivative providers are required to apply for license in order to continue their operations, while being compelled to report all of their transactions to the trade repository.

The introduction of such widespread regulations undoubtedly represent a huge step forward for forex trading in emerging economies, particularly as this was the result of extensive consultation with key industry stakeholders and brokerage firms.

Improving Consumer Protections and Forex Trading Across the Globe

These regulations have been welcomed in South Africa, where forex trading is a relatively new phenomenon and one that was largely viewed with the same trepidation as gambling by many.

Of course, this region has seen a particularly high number of forex scams, resulting in a number of high-profile prosecutions by the FSCA, with this hardline legal approach being augmented by an increasingly proactive approach to regulating the marketplace.

The key takeaway here is that the new regulations will lead to significantly improved consumer protections, with the aforementioned ODP license for OTC derivatives forcing all brokers to adhere to predetermined standards with regards to due diligence and the trading of high-risk products (such as forex).

This type of agreement will also introduce stricter capital adequacy requirements as part of any brokerage-client contract, creating a scenario where traders’ capital is safeguarded and the FSCA has constant access to real-time and historic transaction data.

This represents a much-needed evolution by the FSCA, which was historically established to monitor the conduct of insurance and pension companies. It has certainly brought its expertise to the volatile forex market in South Africa, and while the new regulatory regime has so far been met with cautious optimism, most have embraced the changes and being key to a brighter and more prosperous fiscal future.