Watchdogs crack down on 'spot' forex dealers

JOHN EISENHAMMER

Financial Editor

City watchdogs clamped down yesterday on the burgeoning firms providing unregulated, high-risk speculative foreign exchange dealing to small investors. Closing a loophole in the law, firms have been ordered to apply for authorisation by 1 March or cease trading.

Following a rush of complaints from private investors, some of whom have lost hundreds of thousands of pounds, the Securities and Investments Board along with the Securities and Futures Authority, have decided these short- term or "spot" foreign exchange dealings must come under the protection and restrictions of the Financial Services Act.

SIB appealed to investors in such activities to check whether firms they are involved with are applying for authorisation, and warned that it may have to step in to close firms presenting a grave risk.

The regulatory authorities are aware of 37 such firms actively trading or poised to enter the market, some of them based on the Continent. Some are successors to companies only recently shut down by the Department of Trade and Industry, such as Cathay & West and London and Global.

One of the firms being ordered to apply for authorisation, the London Currency Exchange, based in west London, has two directors who were heavily fined by the SFA for their work with David Coakley, a private client futures and options company closed in 1993.

Peter Ellis and Nicholas Edgeley were account executives with the company, whose trading was described by the SFA as "discreditable, reckless and scandalous".

Another of the companies, Bull & Bear (forex), based in London, has as one of its directors Enver Kemal Jainu-Deen, who had a High Court injunction brought against him in 1990 by the SIB.

The regulators have information that David Rycott, formerly a director of DPR Futures, which was closed down by the SIB, is linked to firms in Denmark and Switzerland planning to solicit British private investor interest in the spot forex market by cold-calling.

"Ordinary people are being asked to part with large sums of money for a very risky business, on the lines of, if George Soros can do it, so can you," said Jeff Thomas, head of enforcement enquiries and investigations at the SIB. This is a fast-growing activity, with speculative products being offered to individuals who are not of great knowledge or experience."

Because they are outside the Act, investors have no compensation in the event of firms failing. These businesses have exploited a loophole in the law that short-term contracts, officially less than seven days, are commercial rather than investment business.

This exemption was originally set up for bureaux de change and professionals dealing in the interbank market. The SIB says the spot forex speculation is not really short-term at all because contracts are continually rolled forward.

But some firms, which have strong capital backing, and their own legal advice that they are acting legitimately, may challenge this new interpretation of the law. "We are ready for a legal challenge and will fight it all the way," Mr Thomas said.

To survive the authorisation vetting, the companies must demonstrate directors are fit and proper, dealers are qualified, they have minimum capital of pounds 600,000, adequate accounting and control mechanisms and a separation of client from company money.