Transaction Trends

By Kristy Naylor, LegitScript Legal Counsel

As the financial market expands and evolves, regulators are struggling to keep up with increasing fraud. However, while financial trading platforms vary in how they are structured and how they operate, there are common red flags that may indicate that a platform — whether it is forex trading, CFDs, binary options, or something else — is engaging in problematic activity.

Consumers and payment service providers should carefully scrutinize any trading platform with which they plan to do business. The following red flags may present elevated risk and warrant additional scrutiny.

Common Red Flags

• Promises of very high returns in a short period of time
• Platforms that offer very short trading periods, such as minutes or hours
• Offers of free money or other incentives to start trading
• Automatic investing options (e.g., “let the computer do it for you!”)
• Language suggesting that customers open an account in another country to get around government regulations
• The option to use credit cards; while accepting credit cards is not unheard of or outright prohibited in the industry, most reputable, regulated brokers will require cash (debit card or bank transfer) to establish an account to trade and never accept credit cards

Risks for Acquirers
Consumers aren’t the only ones at risk. Acquirers and payment service providers face a number of risks related to financial trading platforms:

• Because the platforms offering these nontraditional investment products are heavily regulated and have drawn significant attention from government agencies, card brands typically consider operating financial trading platforms to be a high-risk activity, placing additional scrutiny on acquirers who onboard these types of merchants.
• The prevalence of fraud in the market presents significant chargeback risk, a risk of card brand fines, or possible regulatory or legal action.
• Even if financial trading platforms are operating legally, the significant risk to investors increases chargeback risks if customers lose money when trading.

Important Takeaways

• Regulation is complicated. In the world of financial regulation, both where you conduct the activity and where the customer is located can determine which laws apply. Generally, a platform does not have to be based in a given country to be subject to its laws.
• Some platforms may appear to be licensed. Many websites offering exotic trading options may have valid licenses in certain jurisdictions, such as Malta or Cyprus, and claim that these licenses allow them to operate worldwide. In most cases this is not accurate, as most regulated markets require a license to operate in a given jurisdiction.
• The market is ahead of the regulations. As agencies move in to regulate some of these financial instruments, the market creates new ones to replace them. Some platforms offer a variety of trading options — binary options on forex, forex trading involving cryptocurrency, CFDs on forex, etc. — and they often call them by different names, which makes it difficult to determine whether they fall within a country’s specific laws.

IOSCO, the International Organization of Securities Commissions, maintains a database of thousands of warnings and alerts that have been issued by regulators all over the world involving investment scams. Searching the database is a simple way to verify that a financial trading platform you may be working with is not the subject of regulatory scrutiny.

This post is part of the series Financial Trading Platforms: Regulations and Risks. This series offers a high-level overview of common and popular complex financial instruments — including forex trading, contracts for difference, and binary options — to help payments companies consider key points when onboarding these types of merchants. For more information, download the full guide.

Posts included in the series:
Part One: Forex Trading Regulations and Risks 
Part Two: Contracts for Difference Regulations and Risks 
Part Three: Binary Options Regulations and Risks 
Part Four: Financial Trading Platforms Risks and Warning Signs