Trading Education - Hidden Conflicts of Interest That Need Regulation?

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Shouldn't someone who addresses a retail customer audience and encourages them to pay?

next jordan belfort

I think we all know this scenario:

There are people on stage, trying to convince the audience that they are just a few steps away from making a lifestyle change, either a second income or giving up their full-time job.

They might say, "Look at the Ferrari on my right, you can have it too. Look at the Rolex I'm wearing, or the Montblanc pen I'm holding, you can have it too, just go to my Financial Trading Academy and change your life .”

I'm not saying all educators are like this, but certainly quite a few. Many people claim to be professional traders, but most are not regulated individuals with CF30 functions under the FCA, which usually means that those who claim to be professional traders are only retail traders!

In fact, we know that for MiFID investment companies, on average 75-80% of retail clients lose money in CFD/FX leveraged trading.

So is it really worth it in the long run for retail clients to pay thousands of dollars for financial trading education? In addition, some educators introduce clients to investment companies and will get a share of client revenue. Considering this business model, isn’t this a smoke bomb to cover up potential conflicts of interest?

Should financial transaction education be included in the regulatory scope of national financial regulators? What should investment firms do when they use educators as intermediaries?

Has MiFID II Changed the Landscape of Financial Trading Education? Should investment firms focus more on investing in client-oriented tools such as "Chasing Returns" or "My Trading Tips" to improve the trading experience for retail clients and provide firms with more long-term clients?

Here are some of my thoughts on financial trading education and how it has evolved. Of course, there are steps that regulators and investment firms themselves should consider.

Are financial regulators turning a blind eye to financial trading education?

This question always confuses me. Regulators like the FCA have been monitoring financial promotions by investment firms, but don't seem to have the same oversight for educators/speakers who think they're the next Jordan Belfort.

They may try to convince potential retail clients that they can make their lives better by following certain trading strategies, but they won't explain the risks of leveraged trading.

Quite simply, independent financial education does not fall under the jurisdiction of FCA’s financial promotion and does not fall within the scope of Peripheral Guidelines (PERG). I find this really odd, if we're talking about the spirit of the rules, shouldn't someone who addresses a retail client audience and encourages them to spend money learning to trade (and subsequently lose more money in real-environment trading) Regulated in terms of Customer Controlled Functions (CF30)?

I remember a prime-time BBC documentary about three years ago about how £1,000 could grow in value through trading. I remember watching a documentary about a guy who lived on a farm, made millions on a demo account, and finally decided to trade on a live account.

Seriously, if the FCA allows the UK BBC to promote the financial trading industry to retail clients because it is not an industry body, wouldn't it be a bit hypocritical to target investment firms that serve retail clients watching TV shows?

Life is often about "cause and effect". If the FCA wants to look holistically and thus act in the interests of the 80% of customers who are losing money, why hasn't it done more to regulate all 'causes'? Financial trading educators, academies and national broadcasters are also regulated, not just investment firms.

What should investment firms do when dealing with financial trading educators?

If you are an investment firm and financial trading educators refer you to clients, it is important to:

1. To what extent did you conduct due diligence on your educators? What to be wary of is:

A．They claim incredible returns, say 80-90%.

B．"My clients don't lose money".

C．"I am a professional trader" (but you will find little evidence of this).

D．Their seminars do not explore the risks of leveraged trading.

E．They draw the client's attention to lifestyle changes such as Ferraris, second income

stream, giving up day jobs.

2. Has your compliance department reviewed the promotional materials that educators will use?

This is important because for a seminar or website run by its educator intermediary, compliance should consider it a financial promotion and approve accordingly before the seminar/conference takes place. Keep in mind that educators are likely to start selling what retail clients attending financial trading seminars care about.

3. How do you plan to pay the educational staffing broker?

If the educators are asking to be paid by volume or share of the investment firm's revenue, then you should decline them, not only is it a matter of conflict of interest, but it may also violate MiFID incentive rules (for the FCA, in the COBS2.3A regulation) . Investment firms can pay educator intermediaries as cosigners on a cost-per-acquisition (CPA) basis at best, which of course should be disclosed to clients prior to engaging with them. Note that reverse processing of a CPA is only considered circumvention.

4. How much weight do you place on financial trading education when developing the appropriateness test scoring matrix?

It should be given less points than experience trading in a real environment.

5. What kind of education can the investment firm itself provide to attract long-term clients?

Some investment firms now provide their clients with their own education to enhance the client's trading experience and bring some brand recognition and loyalty. This is all well and good and shouldn't be discouraged (and compliance should still approve educational materials generated and distributed by the company), but is it enough?

Think tanks of European regulators such as the FCA will remain skeptical about financial education — that is, are investment firms teaching clients how to lose, given retail client loss statistics?

6. Should CFD/Forex investment firms supplement their own education of their clients with truly independent financial education/risk management software and services such as those provided by Chasing Returns or My Trading Tips?

This would certainly show regulators that investment firms are indeed trying to act in the interests of their clients, while at the same time making the client life cycle longer from a commercial perspective.