Forex Trading in the Developing World: Poor Regulation and Scams Leave Scars on the Industry

Cape Town, South Africa
10/06/20

A recent report by eNCA, the most watched news channel in South Africa, has highlighted the real and growing problem of scam brokers in the developing world.

As Forex brokers have switched focus from the highly regulated European market to the developing world, we have seen explosive growth in Forex trading across Africa, Latin America, and East Asia. Brokers have enjoyed this growth largely because of aggressive marketing campaigns across social media, drawing on the high level of smartphone use in the middle-classes. 

The rise in Forex trading in the developing world has also seen a corresponding rise in Forex scams. Many developing countries, most noticeably in Africa, have poor or non-existent regulation and low levels of financial education. These factors, coupled with the high level of social media interaction, has created a tinderbox for massive fraud against individuals. 

The eNCA CheckPoint report focused on one individual who – without the required licence – “taught” visitors to his Facebook page how to trade Forex for a fee. He also charged them for Forex signals and trading robots that were freely available online. When these individuals complained that they did not understand how to use the information he had sold to them, he would offer to trade on their behalf. In this manner, he collected large sums of money from his network of Facebook followers and their friends and family. To draw people in, he produced fraudulent receipts showing massive deposits from his broker, HotForex in this case, to his bank account. 

In an interesting twist, South Africa’s financial regulator, the FSCA, admitted to the show’s producer that, while they warn the public about scammers when they can, their priority is managing licenced entities. 

While this absence of regulatory oversight in these matters is not surprising, it is disappointing and will give other scammers confidence that, even if they do get caught, they will not suffer any real penalty.

Tip of the Iceberg

While this story is a particularly obvious example of fraud, what we are probably seeing here is just another example of a Ponzi scheme, using Forex trading as a disguise. But this is just the tip of the iceberg in terms of Forex trading causing huge damage in the developing world. 

Much more dangerous than individual scammers are the bad Forex brokers who operate in these poorly regulated markets. Much like individual scammers, bad brokers use social media – particularly Facebook – to gain customers, relying on ambitious members of the middle classes to be enticed by the idea of easy money. Once signed up to a bad broker, many people find themselves losing money fast. Rumours are rife in the industry of bad brokers fixing spreads, manipulating chart data, and even altering trade positions. 

Unfortunately, many regulators in the developing world seem unable to deal with this more insidious form of fraud. The FSCA in South Africa relies mainly on desktop audits from brokers and has little understanding of their day-to-day activities. It does not have the capacity to follow up on consumer complaints or undertake on-the-spot inspections. 

This situation is replicated across the developing world and is severely damaging the reputation of the industry.

Solutions

While the long-term solution to this problem is more and better regulation, it will take years to get there. The South African regulator is currently implementing tighter regulations for derivative providers, but whether these will be effectively enforced is seriously questioned by many in the industry.

In the short-term, it has been left to private enterprise to offer guidance to the Forex trading community. In South Africa, TradeForexSA has been working to educate new traders and warn them away from bad brokers, while simultaneously lobbying the regulator to take a more active role. Across the developing world, similar companies are also stepping into the gap left by the government.

But this is little more than a sticking plaster on a gaping wound. Until there is serious political impetus behind real consumer protection and a wide-ranging effort to educate the middle-class, we will continue to see both scams and bad brokers flourish. And the reputation of the entire industry will continue to suffer.

 

 

Disclaimer: This content does not necessarily represent the views of IWB.