How Regulations Can Protect Retail Traders in Africa

CAPITAL markets in Africa are generally not as sophisticated as those abroad. Some stock exchanges in Africa can stay for one year without listing a single company.

With the exemption of South Africa, Kenya and most recently Nigeria, the derivative market is not functional nor properly regulated in most African countries. Derivatives are necessary for expanding the depth of the capital market for both investors and traders.

For example, Nigeria just launched a derivative market and has listed futures contracts that give you the right to buy or sell a specific quantity of an underlying asset at a specific price and future date.

None of the regulatory bodies in Africa has attained a Tier-1 status. In fact, 96% of the African countries are yet to regulate retail forex trading.  This is despite the fact that retail forex trading is becoming popular and many forex brokers from oversea jurisdictions are already signing African traders to their platforms.

Forex Brokers Can Be Held Accountable In Africa

As said earlier, the absence of online retail forex regulation in most of Africa has created loopholes for brokers which they exploit to their advantage. Despite the growing numbers of retail forex consumers in Africa on a daily basis, the lack of adequate regulations exposed African traders to numerous scams and great risks.

For instance, if a broker goes bankrupt, retrieving your fund will be difficult without government intervention. Currently, South Africa has the highest number of approved retail online forex brokers with over 30 of them approved by the FSCA for forex trading. Kenya also has the second highest number. Forex brokers and derivative providers in the remaining African countries are unregulated and not subject to laws in these countries.

Retail forex regulations will make forex brokers to be accountable to the government. It will restrict the amount of leverage offered by these forex brokers. Leverage is the ability to trade a much bigger volume than you would normally. Leverage increases your market exposure beyond your initial investment through borrowed money from brokers.

Due to the absence of regulations, derivative providers offer leverage as high as 1:1000 to Africans because it is to their advantage when you lose, and have to pay them fees & commissions to get back into the market. Leverage and margin share an inverse relationship so the higher the leverage ratio, the lower your initial margin requirement.

Example:  EUR/USD is trading at $1.1127 and you think the euro will gain value against the dollar in future, and you decide to buy a single lot (100,000 units) of EUR/USD at a value of $111,270.

If you select a leverage of 1:1000 this means you must deposit an initial margin of (1/1000 x $111,270) = $111.27 as good faith deposit before your order will be accepted by the broker.

Remember that your initial margin of $111.27 represents 0.1 % of your total order value of $111,270. The danger is that all the market has to do is move 0.1% against you to wipe out your initial margin. In fact a market move of even 0.5% will throw you trading account into negative and make you owe your broker money if you don’t have enough equity in your margin account.

This is the kind of risk African trader’s face because African governments haven’t restricted leverage brokers offer clients. If your initial margin were say 30% it also implies that the market must move 30% against you before your margin deposit is wiped out so this is more realistic and reduces your risk.

In Europe and Australia, the governments through their regulators have ensured brokers restrict leverage on CFD instruments to between 30:1 and 2:1 to prevent its abuse. This is not the case in Africa as only Kenya has restricted leverage brokers can offer clients to 1:400 and this is still risky.

Protect Traders from Investment Scam 

The lack of adequate market regulation breeds all sorts of investment scams. Pyramid schemes where you are expected to register with an amount of money and then bring in more members to enable the pyramid grow, are rampant in Zimbabwe. In 2021, over 10,000 Zimbabwe residents lost about US$32 million to various investment scams.

Most of these scammers actually get licenses from government but end up engaging in activities outside the mandate of their license so government oversight needs to be strengthened.

If strong regulations are put in place by the various African regulatory bodies such as Zimbabwe Stock Exchange, this will possibly reduce the number of scams and Ponzi schemes flying in the cloth of investments.

Protect Traders from Unsuitable Investments

An unsuitable investment is one that doesn’t match your circumstances and personality. An investment that is suitable for one customer may not be suitable for another. Most investment scammers don’t bother about this as they only aim to sell their products to you.

For example recommending dollar cost averaging for someone without a steady source of income may be unsuitable. Binary options, futures and high yield corporate bonds among other risky products might be dangerous for new investors. Such risky products should not be allowed for beginner investors.

Contract for Difference (CFD) is also not suitable for novice traders, and in Europe, CFD brokers are mandated by regulators to display the percentage of their clients that lose money trading CFDs with them. This warning notice is displayed visibly on their website and in their offices. This is an example of efficient regulation that has saved traders in Europe a lot of money they would have lost.

The point here is that the brokerage has a responsibility for ensuring you don’t take on excessive risk, and the government regulators should make sure they adhere to this fiduciary obligation.

With proper regulatory oversight, brokers will know they can be sanctioned if their clients lose money from misleading investment advice. This will compel brokers to act in the best interest of their customers.

Ensure Data Privacy

Data privacy is the control process that deals with the storage and sharing of sensitive data with a third party. Public data should be well guided and protected. Improper handling of your data means if there is a breach, your credit card and password information may be stolen.

Understandably, different countries have peculiar data privacy laws. On the 3rd of December 2021, the Zimbabwe’s cyber security & data protection bill was signed into law by President Emmerson Mnangagwa. This law will regulate technology-driven business and protect Zimbabwe consumers’ data which is highly vulnerable in the cyberspace.

Personal data such as name, sexual orientation, marital status and financial information among others are to be safely stored and protected against criminals.

Similarly, the Protection of Personal Information Act (POPIA) which came to effect in July 2021 was designed to protect South African consumers against data piracy.

When you trade with a foreign regulated broker, you may not be protected by data laws in its country of regulation so if your data is stolen you may find it difficult to sue or get compensated.

With adequate data protection, retail forex brokers will be compelled to follow the law and protect investors’ privacy. This will increase investors’ confidence in the system.

Copy Trading Platforms will be Vetted by Regulators 

Copy trading is when a less experienced trader copies the same trade set-up or position of a master trader. Copy trading helps you to find a master trader with a track record of good results which you can emulate.

Copy trading could be ideal for those who intend to invest or trade but lack the time to do research or adequate knowledge to trade successfully. When the master trader buys, you buy too and when he sells, you also sell. When he adjusts his stop loss, you also do the same.

Copy trading can either be manual or automatic. Manual copy trading is when the master trader sends the signals to you manually, and you must do the execution by yourself. The choice to execute is yours as there’s no compulsion.

On the other hand, in automatic copy trading, your account is controlled by a master trader whom you have selected. Once you open a trading account and choose a master trader, your account will be auto-configured to the master’s account. A master trader also gives you advice and trading strategies but the question is if he is qualified to do so?

In some cases, master traders are unqualified and only deceive their followers with fake trading profiles and win rates,  in order to attract more followers. In the UK, Financial Conduct Authority (FCA) vets master traders who traders copy automatically to protect retail investors & this can be replicated in Africa.

Risk Warning

Retail traders are exposed to several risks which only strong and robust regulations by necessary regulatory bodies can mitigate them.

These regulations will not just protect retail traders, they will also help to increase retail participation in the financial markets across Africa.