BCSC cautions against retail FOREX trading

The British Columbia Securities Commission has noticed a sharp increase in the number of people contacting it about losses incurred by foreign exchange trading. The trend has prompted the provincial regulator to warn individual investors about the perils of trading in foreign currency.

“We are seeing an increase in the number of people doing FOREX trading without understanding what it is, and without understanding the risk involved,” says BCSC spokesperson Andrew Poon.

The BCSC hotlines are being inundated with calls about FOREX. This phenomenon is not isolated to British Columbia. A quick search for “FOREX” on the Internet yields over 700,000 results, including Canadian-based trading platforms and other sites geared toward the average retail investor.

Normally, investor interest is something that the regulator encourages. Poon emphasizes that foreign currency trading is highly speculative and there is an inordinate amount of risk involved that many investors are not aware of. This risk is being compounded by an observed increase in FOREX trading on margin, which amplifies gains but also accelerates losses.

“We really want people to be aware that it’s complex and volatile,” he says, pointing out that tracking and understanding the many variables that affect currency rates requires expert knowledge. “Without this knowledge, investors are likely to lose their money.”

This warning is directed not just at individual investors but at advisors as well. The BCSC requires all advisors who engage in FOREX to register, and urges novice investors looking to trade in FOREX to seek a registered advisor who has the appropriate credentials.

Ross Young, a Calgary-based CFP, says trading in foreign currency should always be very low on an advisor’s planning priorities, even if the client and advisor know what they’re doing.

Young thinks a rising Canadian dollar has piqued the interest of everyday investors. With Canadians purchasing foreign equity investments in record numbers, there is a growing interest in maximizing the Canadian dollar’s buying power.

“Certainly over the last five or six years there has been a massive increase in the Canadian dollar, especially when compared to the U.S. dollar,” Young says. “If a client wants to trade currencies, it should be a small portion of the overall portfolio, unless they actually work in the foreign exchange market on a regular basis.”

Still, Young warns that even professional FOREX traders would probably not take on a large personal exposure to currency markets.

“Even the professionals on hedge funds have lost tons of money trading currency,” he says.

The BCSC also warns that FOREX scams are on the rise. The BCSC red-flags any FOREX investment scheme that offers guaranteed high returns with little or no risks, promises or claims the investor will profit like experts, or boasts of tax-free offshore investment opportunities.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com