CySec Chairman Demetra Kalogerou dresses down the entire retail FX industry on the island, telling executives that she does not like IBs, wants to outlaw call centers and has drastic changes ahead, delivered in a powerful and extremely assertive manner

Right now, as I write, CySec Chairman Demetra Kalogerou is dressing down every senior executive of every Cyprus based retail FX firm and binary options brand in a closed, invite-only meeting.

FinanceFeeds is listening currently to Ms Kalogerou’s stern approach toward the entire Cyprus industry, and how she views particular aspects of its product range, and sales tactics used in distributing the product range to be very toxic.

By contrast to Ms Kalogerou’s usual demure and composed nature, this time she is fiery and has taken a very harsh tone, and is not holding her words back at all.

Beginning her address today, Ms Kalogerou said that CySec is planning to implement a very stringent supervision plan. She lambasted the means by which firms sell binary options and CFD products, and laid into introducing brokers.

“We do not like introducing brokers at all, nor do we like affiliates” – Demetra Kalogerou, Chairman, CySec

FinanceFeeds was privy to this information via an inside decoy, this being the very first ever meeting which senior FX and binary industry executives were instructed to attend, and were forbidden from taking photographs or to make any recordings.

With authoritative tone and strict demenour, Ms Kalogerou said “Your mandate is to protect investors. We have witnessed a very sharp increase in complaints from retail investors. Complaints are coming from third countries against Cyprus based companies.

Retail customers are sending complaints to national regulators as well as the European Financial Ombudsman and ESMA. This increases the concerns as to whether these products should be allowed to be offered to retail investors at all.”

Retail customers are sending complaints to national regulators as well as the European Financial Ombudsman and ESMA. This increases the concerns as to whether these products should be allowed to be offered to retail investors at all – Demetra Kalogerou, Chairman, CySec

With almost forceful prose, Ms Kalogerou said “How best can regulatory supervision be tightened in this field to minimize consumer detriment? CySec supervises 80% of the entire EU retail FX market. This is a big number, and almost all of the firms are in retail FX and binary options. We control 80% of the industry and although Cyprus is the host country, there are very serious concerns from across the world.”

“We have assumed responsibility in that we need to invoke a supervisory action plan. There are currently 24 high priority firms, and we have concerns about their marketing methods. We have checked how they market, their websites, the procedure used in the onboarding of clients which is a big problem. How you approach clients in the first place is key, especially in terms of KYC procedures” she said.

“A lot of client money related complaints have become a great issue here. A lot of markets have been banning these products, an action which started in 2014. And because of the supervisory action plan we have imposed 3 million (not enough – Ed) in penalties until now in terms of fines and settlements have enforced corrective measures. Certain firms have had unwillingness to implement corrective measures so CySec has terminated certain licenses” said Ms Kalogerou.

Those who want to break the law have no place in Cyprus. I will not accept Cyprus to be presented in international media all the time as a region in which companies are not compliant. It is damaging for Cyprus, for CySec and for every one of you. The first thing to address is investor complaints. I expect you all to take all measures and steps to ensure no investor complaints are left pending- Demetra Kalogerou, Chairman, CySec

“Investors come to you first so therefore I expect you to ensure that resolution of disputes is done properly leaving clients feeling that they have been treated correctly, otherwise this goes to other regulators globally.”

“Unresolved client complaints is one of the factors affecting the risk here. Let me put some statistics on it for you” said Ms Kalogerou in a very authoritative manner. “10 CIFs are holding 50% of all the complaints. Most of them are where introducing brokers and rep officers are being used, and instead of doing what IBs are supposed to do, which is to refer clients, they are providing investment advice. This must stop immediately.”

“Now let’s move on to retailers. There are real concerns that products are not appropriate and are too risky for retail investors who are unable to understand the risks of the products being offered. For example, in 2016, 90% of binary clients lost their money. 70-80% are losing money on FX. These percentages are too high. These should be brought down” – Demetra Kalogerou, Chairman, CySec

“These products are sometimes promoted in a very aggressive way, and we have said that for 2 years. Stop it!” she exclaimed.

“Overseas regultors have noticed you using aggressive marketing. A number of countries have introduced a number of measures, not limited to bans but also to marketing restrictions. Belgium, France, Holland, Germany, Denmark and Spain have been instrumental leaders in this. Additionally, measures have been taken in Ireland, Germany and the UK. 10 out of 27 regulators are already taking measures against retail electronic trading in that these products are not appropriate for retail investors” she said.

“Intervention powers will be invoked from January 2, 2018. You have 9 months to think about it” warned Ms Kalogerou.

“In the mean time, in line with the investor protection rulings, each one of you is expected to ensure a program of responsibility. Thereby you can see what investors are appropriate for the product. You can refuse investors if not appropriate. You cannot pass everyone” she said.

“It is not only CySec but foreign regulators that are scrutinizing your marketing material. There is a regulatory body that makes mystery shopping checks. It came to my attention that a regulator came to Cyprus recently to make checks on CIFs that were marketing their products in their territory. The mystery shoppers came to me and reported their findings. I hope you make progress from 2014 from 2017 today because what was reported to me was appalling” she said.

“With regard to branches or tied agents, you cannot have 30% of your clients in one country and no presence there. It is your responsibility to see where your clients are concentrated and where to establish a tied agent or branch. Do consider that you probably do not have the right national approval to cover the tied agent” warned Ms Kalogerou.

“IBS are NOT WELCOME! I do not like IBs. They do not do their job properly” – Demetra Kalogerou, Chairman, CySec

“We have checked the supervisory action plans, and the IBs give investment advice. They sit with their clients, they give unauthorized advice and misleading information and there is no control over them or affiliates. You cannot control affiliates. How do you know what they are advertising, do you have their full procedure? There is no way of controlling expansions in countries like that, therefore if you cannot exercise proper control, you should not expand into those regions” she said.

Legal framework on IBs.

Ms Kalogerou explained that the legal framework on IBs is soon to be published by CySec and ESMA. “Expect to begin implementing it” she said sternly. “Do not wait for CySec to get the circular out. Be proactive. This also applies to tied agents and branches in certain jurisdictions. If you have a resolved client complaint against you in the jurisdictions where you apply to have a tied agent, CySec will not allow that to go ahead unless all complains are resolved properly” said Ms Kalogerou.

At this point, a display of almost anger was put forward. “You cannot have unresolved complaints with other regulators. Of course you have to resolve them, otherwise that regulator will state that it does not want that specific firm to have any presence in the country over which it presides. Before sending me any information about tied agents or branches, make sure you don’t have complaints” she said.

“If you believe this is not a good business model then I suggest you explore less risky financial products. What other products could you develop where clients can have less detriment? Why stick to CFDs only? It is better to take immediate action and make amendments” she said.

“I cannot stand call centers. Especially those which are not regulated!” – Demetra Kalogerou, Chairman, CySec

Ms Kalogerou unleashed her disdain for call centers by explaining that she wishes to ban them all. “I would like to ban all call centers and then ensure you all comply” she said assertively.

“We do not like call centers, especially those not regulated. It is better to ban call centers altogether. Now, if you want to have a sales team, or account managers in your regulated firm, then that’s all very well, but they must be operated by educated staff who pass CySec exams. We will be introducing new exam in 2017, and companies must expect to be reporting all the time and you must monitor them and hear what they are saying. If the sales force of your firm is based in another region, then the same monitoring must apply, and the staff must pass the same pass exams, be equally educated and there should be a specific responsible person to monitor the people there on site.”

How can you monitor people in another country ? We do not like the cold calling. Stop the cold calling! Find other ways of marketing, find other ways of marketing. CySec outlawed bonuses.

“Call centers are what created aggressive advertising. We are banning it, now there is no need for aggressive marketing. We will check over the next year whether you complied and if not there will be trouble” she said.

With regard to leveraged products, Ms Kalogerou said that this is currently under discussion along with other regulators. We expect to adopt another formula, but for now we limit it to 1:50 and this should ensure that the default leverage cannot be changed unless the client has specified an appropriateness for higher leverage.”

“We are looking at banning the distribution of binary options because we have no choice. They are detrimental to clients. We have been researching how they can be properly sold by looking at Japan, and other regions where binary options are popular. We have to change the characteristics to bring in better transparency and execution”.

She also said that ESMA in MiFID II will have the authority to ban products all together in the EU, thus gave an initial insight into this, saying “You need to shape up” to the attendees.

“This is a warning, and I will close down problematic companies which have many complaints. I will need to get approval from third countries first or a legal opinion and I will not allow mirror companies in offshore jurisdictions to offer products to non EU countries under the same shareholders and get complaints from the offshore regulator such as Belize Bahamas, or the Cayman Islands. Additionally I will ban the shareholders as not fit and proper” she concluded.

This is the absolute first time that we have seen CySec rear its head in this fashion, which could represent a turning point for the retail business in Cyprus.