On advertisement-driven platforms such as YouTube, mobile games and social media, it is common to come across an advertisement for foreign exchange (forex) and derivative trading apps. In recent months, certain forex apps have upped the game by employing local influencers for promotional work.
While influencer marketing itself is not a crime, influencers (who may not have financial qualifications) were used to mislead the public by portraying forex trading as an easy moneymaking investment, promising returns in 24 hours. What makes matters worse is the undeniable power of influencer marketing in this day and age. According to Rakuten Marketing’s 2019 Influencer Marketing Global Survey, 80% of consumers have purchased something based on an influencer recommendation.
Checks on social media also show that people with no prior knowledge of forex trading have dabbled in it and lost money. Some have fallen prey to scams through self-proclaimed “brokers”, who tend to promote themselves on social media sites. The concern here, however, is the inner workings of social media platforms that allow unlicensed financial apps to carry out sponsored advertising campaigns on platforms such as Facebook and Instagram.
The Securities Commission Malaysia (SC) has expressed its concern following the gradual increase in the number of complaints from the public on unlicensed activities and scams. In 2020, the SC received 548 complaints, and 978 in 2021. As at June 2022, the commission has received 603 complaints on unlicensed activities. Among them were activities related to unlicensed forex trading.
A 2021 survey by the SC found that the majority of Malaysian respondents have a low level of awareness and knowledge of capital market products. In particular, there is a misconception about the level of risks and returns, as respondents generally have unrealistic expectations of investment returns. This, coupled with the low level of financial literacy, is likely to cause investors to be more susceptible to unlicensed investment activities and scams.
Checks by Wealth on the SC website show that most of the advertised forex or binary derivative trading apps are on its investor alert list for not being licensed or approved to operate. Most of these apps are also domiciled offshore.
“Any entity that carries out unlicensed capital market activities in Malaysia, including unlicensed derivative trading, is considered illegal and will be in breach of the securities laws. This is irrespective of them being approved in other jurisdictions.
“In the circumstances and towards investor protection, the SC takes appropriate actions including enforcement under the securities laws against these entities,” says the SC in an email interview.
On top of securities laws, self-regulation practices among players in the communication and multimedia industry are encouraged to protect investors against misleading advertisements. This is known as the Content Code, which is a set of guidelines outlining best practices and ethical standards of content disseminated to audiences.
The Content Code is developed by the Communications and Multimedia Content Forum of Malaysia, an independent self-regulatory industry body registered under the Malaysian Communications and Multimedia Commission (MCMC). It was set up under the Communications and Multimedia Act 1998 to oversee and promote self-regulation of content over electronic network medium. The body comprises key members that include advertisers, broadcasters, content creators and distributors, internet service providers and more.
However, the reach of these self-regulations is only applicable to local content hosted in Malaysia. Online platforms such as Facebook or YouTube, which are hosted overseas, do not directly fall under their jurisdiction, says Mediha Mahmood, executive director of the Content Forum.
She adds that social media marketing conducted on these overseas platforms has its own community guidelines that set its standards or terms of service. Hence, the review mechanism used for content moderation differs, as it depends on the social media platform’s policy.
“The ads [on overseas social media platforms] may be in violation of the [local] advertising guidelines or principles; it may not necessarily be a breach of the community guidelines or policy of the social media platform, and vice versa. We often advise consumers to be empowered and use the self-regulation tools available on the internet.
“For example, on each social media platform, there are self-regulation tools such as the ability to lodge reports. If you have identified irresponsible or unethical advertisements online, you should report them as soon as possible. Should it be against the relevant community guidelines, the content will be taken down,” Mediha says.
Carliff Rizmal Carleel, head of influencer marketing at one of the leading digital advertising providers, Innity Sdn Bhd, says influencer regulations and guidelines are typically only practised by influencer marketing companies like themselves. Innity’s Passionation makes it a point to take an objective approach to each client, ensuring that the products offered to consumers are not harmful.
The problem, however, is when companies approach influencers directly. Carliff says influencers who are not well versed with the potential risks of collaborating with unregulated companies may be persuaded by the payment offered.
“In general, everyone needs to be aware that anyone can post anything online. Social media has basically turned every individual into a broadcasting house. Anything that attracts eyeballs will also attract advertisers,” he says.
Influencer marketing, a force to be reckoned with
With great influence comes great responsibility. Innity’s Carliff says while it may not be wrong for someone who is unfamiliar with a brand or product to promote it, the product needs to be legitimate. Usually, brand owners/promoters would prefer to work with influencers who relate closely to the brand’s own category, as the content will no doubt resonate better with the audience via subject matter experts.
However, Carliff says it’s common nowadays to see other brands engaging with influencers, regardless of their expertise, as long as they have a huge following.
“Advertising has always followed where the eyeballs are. Now, with social media, it has evolved into platforms where those who are passionate and able to create their own media channels can monetise this and build their very own career. Marketing dollars are trickling down to more than just the agencies and publishers, which is brilliant!
“But with that kind of inclusivity, more education, responsibility and due diligence needs to be taken by each influencer, especially those who choose to engage with brands directly.”
Aaron Tang, financial influencer and founder of mr-stingy.com, says that while he believes it isn’t a necessity for influencers to have a financial background in order to endorse a financial product, he personally would feel uncomfortable endorsing financial products that are on the SC’s investor alert list.
The issue here, he explains, isn’t focused on financial background. “For example, we’ve seen celebrities from the music world (without financial qualifications) work with banks before. It’s more about: ‘Is it right to endorse a product that’s been clearly marked as questionable by the regulators?’”
In terms of tainting the reputation of financial influencers, Tang says these acts by forex trading apps may tarnish the community a little. However, with a little work, most people will be able to discern between those who are responsible content creators and those who aren’t. Ultimately, each content creator will be judged on his or her own merits.
“In the influencer space, it’s going to be extremely tough to regulate. I hope that those with followers will ask themselves serious questions before promoting or endorsing anything: ‘Is this suitable for my audience?’, ‘Am I asking people to take on risks they can’t manage?’ or ‘Is this causing harm to people who look up to me?’”
Taking into consideration the power of influencer marketing, Mediha says the Content Forum encourages the growth of this type of marketing by advocating for it to be done ethically — similar to all other forms of traditional advertising and marketing communications.
The danger, however, is when brands use influencer marketing to do things they cannot do or advertise via traditional platforms, thinking that the advertising guidelines don’t apply to influencers when, in actual fact, they do.
“This irresponsible practice not only puts consumers at risk of being exposed to misleading ads, but the influencers themselves are also potentially risking their reputation and might even be held liable for the claims that they make in their content,” she says.
“We continuously raise awareness among influencers that their paid posts are recognised as advertisements and, thus, they need to comply with advertising guidelines.”
Tang’s advice is that people should adopt a more patient approach when purchasing investment products, instead of putting money in them just because an influencer has endorsed it.
“Study the product, read reviews, understand what it really does and how it makes money. Ultimately, you might not even decide to sign up for the service, but learning about new products and technology is good for your own knowledge. With a little patience and homework, I think people can make good decisions for themselves,” he says.
Financial advertising regulations in place
From the regulator’s perspective, the SC says it recognises the importance of advertising and promotional activity, as it forms an integral part of the developmental effort within the capital market.
However, the SC is cognisant of the risks that promotion and advertising may pose to investors. The regulator has issued, among others, Guidelines on Advertising for Capital Market Products and Related Services, which provide a general framework for advertising and promotional activity within the capital market to promote responsible advertising and promotion.
For advertisements, there are numerous guidelines that can be referred to, but the main ones are the Content Code and the Malaysia Code of Advertising Practice. The Malaysia Code of Advertising Practice, under the purview of the Advertising Standards Malaysia (ASA Malaysia), is a rule book for non-broadcast and non-networked advertisements, primarily concerned with the content of advertising.
As for quick capital gain investment instruments like forex, in Section 3, under Part 5 of the Malaysia Code of Advertising Practice, the advertiser needs to ensure that the public are fully aware of the consequences of responding to the advertisements on financial services and products. The consequences should be clear (and not misleading) and must not take advantage of people’s inexperience and gullibility.
Part 3, paragraph 9 (Advertisement on Financial Services and Products) of the Code provides that any advertisement for financial products and services must comply with all legislation, rules, guidelines and regulations laid out in the Code.
“Failure to adhere to the Code will result in the withholding of advertising space and withdrawal of trading privileges from advertisers. Besides that, an advertiser’s reputation can be severely tarnished if it is seen to be breaching the rules designed to protect consumers,” says Mediha.
“This is enforced by ASA Malaysia, which may publish details of the outcome of investigations it has undertaken. In case the advertisers and media owners persistently break the Code and refuse to work with ASA, then ASA will refer them for further action to other government bodies.”
The Content Forum, too, has regulations in place for advertisements. For example, in Part 3 of the Content Code, paragraph 4.9, it is made clear that: “Advertisements shall not contain or refer to any testimonial or endorsement, unless it is genuine and related to the personal experience over a reasonable period of time of the person giving it.”
Under Part 3, paragraph 6.3 of the same code, the rules of disclosure are also made clear. Whenever influencers are posting something under a commercial arrangement, it “shall be clearly disclosed as being done in exchange for payment in cash or some other reciprocal arrangement in lieu of cash”.
Disclosure is an important tenet in ethical advertising, says Mediha, and influencers are urged to practise it.
“If there is a breach of the code, the advertisers will be issued a written reprimand, or receive a fine not exceeding RM50,000 and/or require removal of the content or cessation of the offending act. The offending party may also be referred to the MCMC for further appropriate action as may be required,” she says.
Mediha adds that from their understanding, there are no specific bans on forex trading apps and she welcomes any information proving otherwise. The Content Code makes clear that if something is banned in any instrument, it is prohibited.
In need of tighter regulations
Bank Negara Malaysia’s website states that the Malaysian forex market is open and accessible through its large network of licensed onshore banks, both local and foreign banks, custodian banks (local custodians and global) as well as international central securities depositories that can be approached by investors for access to the Malaysian financial market.
Bank Negara has also cautioned the public on the buying and selling of foreign currency in Malaysia, as this is only allowed with licensed commercial banks, Islamic banks, investment banks and international Islamic banks (as provided for under the Exchange Control Act 1953) and with licensed money services business providers or money changers (as provided for under the Money Services Business Act 2011).
In addition, shariah-compliant financial products, including forex-related transactions offered and transacted by licensed Islamic financial institutions are approved by the Shariah Committee of the respective financial institutions with endorsement from the Shariah Advisory Council of Bank Negara.
Across the Causeway, the Monetary Authority of Singapore (MAS) seems to be more accommodating of offshore and e-trading apps. However, these entities will need to be registered with the regulatory body in order to operate. Yet, despite MAS’ regulatory requirements, unlicensed trading apps are still advertised online in the republic.
However, Bank Negara cautions the public against participating in any illegal foreign currency trading scheme offered by individuals or companies.
Illegal foreign currency trading refers to the activity of buying or selling foreign currency by an individual or a company in Malaysia for trade purposes with any individual who is not licensed or approved by Bank Negara under the Financial Services Act 2013 or the Islamic Financial Services Act 2013.
“Such a scheme involves trading activities in foreign currency for returns from the movement of foreign currency exchange rates. A list of authorised financial sector participants who can carry out foreign currency trading can be found on Bank Negara’s website,” says the regulator.
Industry veteran prefers equity over forex
Savvy individual investors don’t trade foreign currencies for extra money, says Edwin Goh, who has close to three decades of experience trading the markets, including forex. He has held the position of head of trading at both a local and foreign bank.
“Even proprietary traders at banks have been having a hard time generating good profits from trading forex. We used to have a lot of proprietary forex traders on the trading desks, but after a while, it was hard to justify their existence. There are far fewer proprietary forex traders today.
“There will be years when they make RM5 million, or even RM10 million, and there will be bad years when you lose several million. But even if you make a few million, a bank has to consider various costs, including the cost of hiring the traders and the capital risk. You add them all together, the returns may not be that great.”
There are obvious reasons why forex is a tough market to trade. It is the most liquid market in the world, traded by some of the top minds in the investment community, with only over 20 currency pairs that are most commonly traded in the market.
“As it is the most liquid market, the most prominent and top hedge funds in the world, such as the Quantum Fund and Renaissance Technologies (a quant-focused hedge fund), go into forex when they want to take a position [in the market]. They have their research backed by people with PhD qualifications and knowledge. What advantage do you have against these guys in the 20-plus instruments?
“[Even as a veteran in the industry,] I don’t go into FX on an individual basis.”
Secondly, local forex trading services are often offered by entities based elsewhere, including some offshore islands that are not “properly regulated”. An investor would not have any recourse if anything were to happen, says Goh.
For instance, investors can set a stop-loss order to sell their currencies at a specific price to avoid further losses. But the forex entities could sell their currencies at a few basis points (bps) below their target price, causing them to lose more than they should have, or even receive margin calls with their deposit totally wiped out.
“Your USD/JPY stop-loss sell order could be 102.12, for instance. But you get filled up at 101.90, which is many bps below. They would tell you that the market is volatile, and that’s the best price they can get for you. You know they make a little bit more money from you by doing so (your loss is their gain as forex entities trade against their clients), but it is very hard to argue, especially when they are based elsewhere.”
As an individual investor, Goh prefers to invest in equity.
“The reason is simple. There are over 4,000 companies listed in the US market alone. I’m sure there are always some companies that the market isn’t paying attention to when the [broader] market is on a tear. With in-depth research, I’m able to identify some of the hidden gems.
“I’m sure there are people who make money occasionally trading forex, when the market moves in one direction, like crypto sometimes. But how many get to keep their money over the longer term? When there’s a bubble, everybody makes money.”
Banks trade forex differently from retail investors
While banks earn profits from trading forex, Goh says they operate differently and on a different scale. For instance, they trade forex to fulfil their customers’ trade requirements and earn a small profit consistently from price differences.
“Banks trade forex as they have customers that are corporations and SMEs (small and medium-sized enterprises). These companies trade forex not for speculation, but their trade requirements (and hedging). They buy US dollars for payment purposes and sell US dollars for repatriation of profit. When these companies make these transactions, banks quote them a price to make a small profit. You multiply that small amount by a few billions, that’s where banks make money. They are not trading forex for gains by taking on additional risks.
“Secondly, banks impose controls and limits [over what currencies and how much their traders can trade]. Lastly, banks usually trade in currencies that they have an advantage in. For instance, they trade USD, MYR, where they are more familiar with the demand and supply dynamics. They don’t usually trade things like GBP, CHF or CAD.”
Forex not volatile, but leverage kills
Goh adds that investors might perceive that the forex market is volatile but it really is not, compared to the stock market. In general, the implied volatility of forex is 10% while stocks could go from 20% to 50%.
“Think about it. The US dollar against the ringgit rate has been hovering around 4.40 to 4.45 for quite a while. It’s not volatile.”
However, the profit and loss of an investor could swing wildly when a huge amount of leverage is added into the equation. It is not uncommon that individual investors are given leverage of 100 times or more by forex entities, says Goh.
“The market and instruments are not volatile. But because of the leverage that is given to you, your profit and loss can be volatile. It is as (vice-chairman of Berkshire Hathaway) Charlie Munger said: ‘Smart men go broke three ways — liquor, ladies and leverage’.”
Based on his knowledge, Goh adds that unregulated and lesser-known entities that offer forex trading services tend to earn their money by acting as the “principal” by trading against them. For instance, if the client takes a long position on the USD against the yen, and the former strengthens against the latter by 10%, the client makes 10% while the forex entity loses the same amount of money. But if the USD weakens against the yen, the forex entity gains while the client loses.
Another way the forex entity makes money is to provide clients with huge leverage backed by collateral, such as cash. The higher the leverage, the more volatile the profit and loss, the more likely investors will lose money. For instance, an investor who takes on 100 times leverage would lose all his principle when the market moves by just 1%.
“When prices fall below the margin requirement, it will trigger a margin call, which, if not met promptly, will result in the forex entity closing out all your positions at a huge loss [on your end],” says Goh.
Wouldn’t these forex entities lose money to smart traders? Goh says they do sometimes. But it has been proven time and again that 90% of retail investors lose their money trading forex. One of the main reasons retail investors lose money is due to trading psychology where they tend to “cut their winners short and let their losers run”.
It means they tend to take profit quickly, but cling to their losses much longer than they should.
“As they are trading against you, they earn their bucks from your losses,” reminds Goh.
Goh says some entities disguise themselves as forex service providers but run Ponzi schemes beneath the surface, such as the JJ Poor to Rich (JJPTR) scheme that went bust in 2017 and claimed 400,000 victims, including 300,000 locals and 100,000 foreigners. Its founder Johnson Lee was charged and arrested that year.
There are also entities that publish their own foreign currency prices online and manipulate those prices to scam investors.
“However, I don’t think there are many entities like these nowadays,” adds Goh.