Retail Forex & CFD trading in Africa is booming & many large global CFD brokers have applied or gained full regulation with FSCA, CMA in South Africa & Kenya respectively in 2020.
Since the last decade, the African capital markets have expanded due to the relatively stable economies and retail investors' growing interest. South Africa, Nigeria, and Kenya had registered the highest retail trading volume in the last 5 years in Africa.
The main reasons for the growth are said to be the young demographics, cheaper internet, higher mobile penetration, and tight regulations.
South Africa’s forex regulations were introduced in 2004 by FSB (as Forex Investment FSPs under FAIS Act, 2002) almost more than a decade ago which was only country on the continent that allowed brokers to legally operate, these regulations were amended under newly formed FSCA in 2018 to include OTC derivatives.
In 2017, Kenya became the second only African country to have a regulatory regime for Online Forex Trading. The Kenyan regulatory authority CMA put a regulatory framework in place on 27th August, 2017.
And first broker EGM Securities got its license in Feb, 2018 which started the new chapter in the online forex market and retail forex trading in the region.
This added the forex & CFDs to the legalized & mainstream capital market operations in the country alongside stocks, derivatives & commodities opening it to more investors who were earlier reluctant and unaware of the forex market.
Regulated Brokers can now freely market & provide their online trading services in Kenya and retail traders can now trade currencies in a regulated environment.
More traders are gaining trust in the forex trading industry as they can now visit brokerage offices in Kenya and they have trust & safety of local regulator in case of wrong doings of brokers.
But, despite these regulations in place & the industry growth, there are certain risks & cause of concerns. We look at some of the concerns and the overall state of local online forex trading industry since it has been regulated.
Growth in Online Forex trading in Africa during COVID-19 pandemic
The daily retail forex trading volume in Africa is the largest in South Africa, followed by Nigeria & then Kenya. South Africa is the most prominent hub of forex trading in Africa with the highest number of regulated brokers.
Leaving aside institutional investments, Nigeria (290,000) is estimated to have more retail traders than South Africa (250,000). Lastly, Kenya, which is a relatively new regulated market have an estimated 90,000 retail traders.
South Africa has always been a popular market for traders and brokers in Africa due to the strong regulation provided by Financial Sector Conduct Authority (FSCA).
Nigeria currently doesn't have any regulation for forex trading currently; most retail investors trade via FSCA & other foreign regulated brokers. On the other hand, Kenya's Capital Market Authority (CMA) which started forex regulation in 2017 is picking attention of African & Kenyan traders.
As per Trade Forex Kenya’s stats & estimates, Kenya is the third biggest retail forex trading market in Africa & is a regulated market. In 2020, the Kenya's online forex trading market had an estimated 80% growth in retail trading.
The COVID-19 pandemic fueled the growth as people started trading forex, commodities, indices and gold for various reasons:
- Due to the lockdowns in 2020 because of the pandemic, many people had to work from home, whereas many were left without employment. Especially millennials started seeking alternative ways to sustain or supplement their low income, and started trading online. This has been the trend globally.
- Secondly, the improved telecommunication infrastructure in Africa has enabled people to trade online with their Smartphones & other devices.
- Thirdly, lower capital requirements, high leverage, and marketing by CFD brokers has attracted more new traders in the forex market.
CMA Licensing and Online Forex Trading Regulatory framework
Before the CMA regulator brought regulations, it was estimated there were around 50,000 retail traders who were investing in forex through foreign brokerages illegally. So, to tighten the market control and ensure safety of the investors and to increase oversight on brokers, CMA proposed to regulate the industry.
Kenya's financial regulator CMA published a draft titled "Capital Markets Licensing Requirements" in July 2016 with proposed amendments to Capital Markets Act, through the Finance Bill, 2016 with request for submission of comments from stakeholders by August 17th, 2016. This bill proposed to have effective and safe online forex trading environment for Kenyans.
Finally, after the public discussion on this, the regulations came into effect on 25th August, 2017 as THE CAPITAL MARKETS (ONLINE FOREIGN EXCHANGE TRADING) REGULATIONS, 2017.
This new regulatory framework was put in place to protect the investors' interests and ensure a conducive environment for Online Forex & CFD trading.
With these regulations, the licensing was made mandatory for all forex brokers in Kenya and it is illegal or criminal offence to operate without such license. Kenya’s Retail Forex Market has since grown about 80% percent with over 90,000 traders.
According to the guidelines in these regulations, the broker has to have these qualities to be eligible for providing online forex trading services to retail investors in Kenya:
- The broker must be a limited company by shares
- The company shall have a CEO with more than five years of experience in buying, selling, or dealing in forex, forex futures, or futures contracts. The CEO should also be fit and proper persons as prescribed under the 24A section of the Act.
- The company should have adequate office space and trained staff to discharge the trading services effectively.
- The company's director and key management persons should be fit and proper, as mentioned in 24A.
- Minimum capital requirement: Ksh. 50 million (approx. $500,000) for dealing broker license, Ksh. 30 million for non-dealing broker license and Ksh. 10 million in case of money managers.
- The entity should make an undertaking to maintain the capital adequacy ratio in all circumstances plus 8% of liabilities owed to forex customers in excess of Ksh. 30 million.
- The company should ensure that Ksh. Thirty million or 8% of its liabilities (whichever is higher) is in liquid form at all times. Money managers have this requirement set at 8% of liabilities or Ksh. 5 million.
- The brokers have to obtain a letter from CMA recognized Trading Platform for fulfillment of requirements. Money managers need to enter agreement with a dealing or non-dealing broker.
As per the Capital Markets (Online Foreign Exchange Trading) Regulations, 2017, there are three types of licenses a broker can get:
1. Dealing Online FX Broker
A dealing online forex broker functions similarly to a market maker. The broker licensed as a dealing online forex broker has the following characteristics:
- It opens client's accounts and provides a trading platform to its customers.
- It provides access to market information to its clients.
- It constantly monitors the trader's position or provides daily reports.
- The entity trades as principal and market maker.
2. Non-Dealing Online FX Broker
A licensed non-dealing FX broker means CMA has authorized the broker to act as a link between the foreign exchange market and traders in return for a commission or mark-up in spreads. The main difference between a dealing and a non-dealing broker is that the latter can't engage in market-making activities. It also provides a trading platform to its clients, but it can't place orders on behalf of its clients. The majority of online brokers in Kenya are non-dealing FX brokers.
3. Money Manager
A licensed money manager FX broker chooses and invests prudently in the forex market on behalf of their clients. The manager develops an appropriate strategy according to specific client's needs and invested capital. A money manager manages all the client's investments, takes positions, and undertakes financial analysis.
Note: The CMA currently prohibits online trading in currency pairs involving Kenyan shilling; and binary options.
CMA has restricted leverage at four hundred times (1:400) of client’s deposit for currencies and other assets.
Requirements & Obligations:
- Brokers must display/show risk disclosure to the clients.
- Brokers must observe high standards of integrity, fair dealing and market conduct and act with due skill, care and diligence.
- Brokers must avoid conflict of interest with their clients.
- Brokers need to keep strict segregation of the clients’ & their own funds.
- CMA also has requirements under risk anti money laundering rules to have an AML officer.
- Brokers also need to appoint auditor to audit their books.
- Brokers are required to keep books for period of 7 years with daily records of all orders; ledger of assets, liability, reserve, capital, income and expense accounts; records of transactions with the banks; trial balances have to prepared every 6 months. CMA has the right to inspect the books of the brokers.
CMA Reporting Requirements
With 15 days of end of each month, brokers need to the give details of any customer complaints and resolution status; (b) evidence of daily reconciliations; (c) for the money-manager, reports on the total funds under management; (d) a full set of monthly management accounts; and (e) risk-based capital adequacy returns.
On monthly basis, brokers need to report traded volumes per currency.
CMA’s Complaint Procedure for investor grievance redressal
As per CMA regulations, brokers need to have a compliance officer who is accredited with Chartered Institute of Securities and Investments for handling investors’ grievances.
CMA has also created a public complaints portal to protect investor interests where investors can raise a complaint if they feel they have not been heard by the broker or their representatives or if there was any unfair dealing on part of broker.
Typical complaint procedure is as follows:
If the complaint is not handled with one business day by a representative at broker, then broker is required to assign the issue to a senior representative with his/her name and contact details, who has to acknowledge the complaint and get back to you within 5 days. The final response must be sent to the complainant within 28 days. If the customer remains dissatisfied by the broker’s response may contact CMA with the complaint.
Four Forex brokers have gained CMA License
Given the credible regulatory framework & demand for trading in Kenya, many of the leading global forex brokers have gained CMA license to operate and provide online forex trading services to Kenyan clients.
Currently, there are four CMA licensed forex brokers in Kenya, EGM Securities (part of Equiti Group) –operating the brand FXPesa with License No 107, SCFM Limited – Scope Markets with License No 123, Pepperstone with License No 128 & Exinity Capital East Africa Ltd (License No 135) which owns the brand FXTM & Alpari.
Pepperstone Kenya and Exinity Limited received their CMA licenses in 2020. All four online brokers are non-dealing forex brokers (that means they are not market makers). Apart from them, there is also Standard Investment Bank Limited (Mansa X) with a money manager license.
Many Foreign brokers are still operating in Kenya without CMA License
The recent surge in online trading amid COVID-19 has prompted the CMA to warn against engaging in forex trading through unlicensed entities.
Many foreign CFD brokers accepts Kenyan traders. Almost all the CySEC regulated forex brokers, with a few exceptions, accept traders from Kenya. But they are not authorized by CMA for offering Online Forex trading to Kenyans.
In a statement released on March 30, 2020, the Kenyan regulatory authority stated that retail investors risk losing money trading via unlicensed brokers, and its regulation doesn't go beyond the national frontier.
That means in case of any dispute between an investor and an unregulated online FX broker; the CMA wouldn't be able to safeguard the Kenyan investors' interests. It has also raised concern over international brokers providing their services in Kenya.
CMA requires all FX brokers and money managers not having licenses to operate in Kenya to cease and desist from trading.
The regulatory authority has noted that many international brokers are advertising CFD trading products during the COVID-19 pandemic without a license. According to CMA, these firms should cease their advertising activities unless they have a right to operate in Kenya.
The CMA has put a clear warning against unlicensed brokers. It has also appealed to the public to report online fraud and illegal transactions to CMA-Capital Markets Fraud Investigation Unit.
It simply means that retail investors shouldn't trade via an unlicensed broker. The onus is on traders. If they trade via them, the CMA won't be able to protect their investments.
Concerns and the Future
Kenyan forex trading ecosystem is in the evolving stage of market regulation. Unlike South Africa, with a robust regulatory framework by FSCA, Kenyan CMA is relatively new and has to cover a lot of ground to make the online trading safe and accessible to everyone.
There is also a concern over Pyramid schemes and online frauds in forex trading. It doesn't come into the regulatory body's radar unless investors start reporting scams and losing their monies.
Secondly, lack of education and online trading risks make the online forex world a relatively dangerous place for new investors.
Thirdly, since forex brokers in Kenya provide high leverage of up to 1:400, low capital requirement, many inexperienced traders are exposed to higher risk and lose their small savings through online trading.
Unlike ESMA, CMA regulated brokers don’t have to publicly show the percentage of traders that lose with them, also leverage restrictions are not enough or at par with ESMA standards. There is a need to review the policies on leverage that can be offered to retail traders.
Fourthly, local brokers lack brand value & appeal for traders in comparison to global brokers. The current regulatory restrictions don't allow them to increase the product offerings such as Cryptocurrencies and other instruments. That's the reason why many Kenyans still trade through foreign brokers.
To counter the lack of awareness among investors, CMA has started online courses and study materials on their website in conjunction with regulated brokers.
Considering the changing environment & as number of traders grow, it can be expected that CMA in coming years will place a lower leverage caps and include more CFD instruments under its regulatory framework.
