In mid-March 2012 the brokerage company WorldSpreads UK showed a deficit of 13 million pounds and was immediately closed for fraud. Just a few days before the negotiations of the coverage shortfall was carried out by London Capital Group and IG Group, but the deal never took place.
Today the most reliable financial regulators are considered NFA, FCA (ex-FSA), BaFin. In previous articles I have already told, what may cause the trust to brokers with a license of offshore regulators on the example of IFSC and CySEC. But again I would like to emphasize that the same Cypriot regulator CySEC still brings benefit, too, so it can’t be called completely inactive. And in proof of this a small story about how eminent regulator in the UK the FSA (the FCA from April 2013-th year) could not also cope with their duties.
License of the financial regulator: good, but not reliable
The history of WorldSpreads company began in 2007, when financial markets were growing rapidly. And even the protracted crisis which began in 2008 not only affected broker, but instilled confidence in their abilities after the crisis in his work is almost not affected. As a result of growth in turnover, WorldSpreads was able to get the capitalization to 40 million pounds (at the time of bankruptcy, approximately 30 million). According to the requirements of the FSA, the broker had its segregated account in the bank, which proved to be one of the weaknesses in the system.
The system of segregated accounts means that the broker has a Bank account in his books is divided into two parts: the money of the broker and clients ‘ money. In theory, as a result of bankruptcy, the money of customers would have to remain untouched, however, the broker does not have a “list” of transactions for each client separately (this is the total money in accounts is divided by the dimension). Therefore, even in the presence of segregated accounts, there is a risk that the broker will take total position on the liquidity provider. That is to steal money of customers.
License of the financial regulator would mean that the broker is under control, however, in March 2012, in segregated accounts of WorldSpreads were only 16.6 million pounds and 13 million disappeared.
Later, KPMG, the auditor will determine that employees of WorldSpreads under permitting of customers to purchase their securities from the stock exchange just put on your offshore structure, all 13 million pounds. This event has become precedent in the UK, but more importantly, it hit hard the reputation of major institutions:
- Ernst&Young. Auditor of “big four” has conducted annual audit from 2007 to 2012, but in 5 years from it there was not a single allegations against WorldSpreads;
- The FSA. Controller silently relied on the reports of the auditor, so the gap in the balance WorldSpreads produced a bombshell.
The lesson of WorldSpreads was the occasion for a review by the regulator of its policy. As a result of bankruptcy of WorldSpreads, the following changes in the FSA have been made:
- the FSA changes to the FCA. Now the new structure applies different methods to collect statements of supervised companies;
- inspection of brokers carried out not only as the auditor once a year, but by the regulator once a quarter;
- all affected customers from WorldSpreads got a refund, albeit partial sum (the owners of large deposits received up to 40% of the money).
Litigation between auditors Ernst&Young and KPMG (the second was the plaintiffs as administrator of the bankrupt broker) lasted 2 years and ended with the settlement agreement.
As you can see, the license of the financial regulator is not always a panacea against possible fraud of the broker. However, it is safe to say that clients of the brokers (the FCA) are under a more serious protection than the client.