Broker Regulations: Why Licensing and Regulation Matters with Forex
Experts encourage novice and seasoned FX trading professionals alike to always use regulated brokerages. When you trade Forex online, the most important considerations are licensing and regulation. While many Forex brokerages are legitimate, there are also scam artists in the mix. The only way to avoid these bad players is to seek out fully licensed Forex brokers.
Regulatory compliance ensures that the integrity of your personal and financial information is guaranteed at all times. Brokers that subscribe to the frameworks set out by government financial agencies risk losing their accredited status and ability to operate if they do not comply with safe trading practices, regulatory rules and regulations. Let’s take a look at several leading regulatory agencies and the rules of enforcement they impose upon FX brokers:
CySEC – The Cyprus Securities and Exchange Commission is arguably the most prominent and pervasive regulatory watchdog agency in the world. It is tasked with regulating the financial markets within the CySEC domain. The range of financial services companies that fall under the CySEC umbrella include Forex brokers, financial and insurance companies.
CySEC is geared towards protecting the trader/investor from unfair trade practices imposed upon them by the broker. All CySEC-licensed brokers must subscribe to the trading terms and conditions as set out by this regulatory agency.
CySEC is a government agency that acts in the consumer’s best interest. It covers services to EU member states. Since Cyprus is a member of the European Union, all the financial regulations of The Cyprus Securities and Exchange Commission follow European laws, notably MiFID. It is primarily a European regulatory licensing body.
FCA – the FCA, or the Financial Conduct Authority is a UK financial services Authority. The FCA is tasked with providing regulation for some 56,000+ financial services companies and markets throughout the United Kingdom. It is the consumer watchdog organization that ensures that UK clients are treated fairly by Forex brokerages licensed in the UK. The FCA is also the Prudential regulatory authority of some 18,000+ businesses. These include investment companies, insurance companies, banks, credit unions, and building societies. The FCA functions by promoting healthy competition in the UK, protecting consumers from unfair practices, and preserving and maintaining the integrity of the financial markets.
BAFin– BaFin is the financial supervisory authority for Forex companies licensed and regulated in Germany. It is known as the Federal Financial Supervisory Authority, or Bundesanstalt für Finanzdienstleistungsaufsicht. This German regulator currently oversees some 4,000+ banks, financial institutions, investment funds, insurers, and Forex companies.
ASIC – The Australian Securities and Investments Commission (ASIC) acts independently to provide corporate governance over the financial services sector of Australia. It is run by a member of Parliament of the Australian government and was founded in 1998. The parent organization of ASIC is the Department of the Treasury, Australia. As with other licensing and regulatory agencies around the world, ASIC is a consumer watchdog organization.
FSB – The Financial Services Board (FSB) is the South African authority which oversees the safe functioning, licensing, and regulation of Forex brokers in South Africa. It is an independent arm of the SA government and regulates all non-banking financial enterprises in the country. This includes, but is not limited to Contracts for Difference markets, over-the-counter markets, investments, stock exchanges, securities and the like. The FSB is tasked with protecting consumers/traders from financial malpractice, scams, and unethical operations. The FSB was set up to protect traders from financial malpractice.
Be advised that there are dozens of agencies that currently license, regulate and oversee the trading frameworks of Forex brokers around the world. These include the following: MFSA, CNB, CSSF, IFSC, CIMA, GFSC, AFM, CMC, BFSC, EFSA, HKSFC, FMRRC, FMA, BCU, MTR, CIMA, and many more. Each regulatory authority acts in the interests of Forex traders in its jurisdiction.
Benefits of Trading with a Regulated Broker
Regulated brokers offer peace of mind when you are conducting real-money transactions, trading activity, and sharing sensitive personal information online. The regulatory authorities that license brokers ensure compliance at all times. Regulated brokers provide recourse in the event of mismanagement, malfeasance, or improper conduct on the part of the broker. They provide protection to clients through the regulatory authority in question. There are 5 primary reasons why you should always trade FX with a regulated broker, including the following:
- Evidence of a Fully Regulated, Licensed and Operational FX Brokerage – your decision to trade Forex online is an important one. It is imperative that you work only with a legal business entity, and one that is subject to the rules and regulations of a government agency or official watchdog authority. The only way to ensure that a company’s fully licensed and regulated to offer real money trading is regulation.
- Recourse in the Event of a Dispute – fly-by-night Forex brokers are difficult, if not impossible to contact. With regulation, there is always a telephone number, email, customer support desk, and real person waiting to assist you. Any claims that you need to file against the broker are infinitely easier when a broker is regulated. As such, any refunds that you are due, money that needs to be paid out etc. can be done through regulated brokers.
- Reputable Trading Platform – Forex trading is predicated on the quality of the trading platform in question. Regulated brokers must run fully licensed software for their traders. Regulation ensures that the software platform meets all requirements.
- The Investor Compensation Fund – the ICF is perhaps the best kept secret of all regulated Forex brokerages. Thanks to CySEC, the Investor Compensation Fund (ICF) is the ideal investor protection mechanism for clients at FX brokerages. The Investor Compensation Fund is a member fund, established along the lines of Article 59 (1) and (2) of LAW 144 (1) 2007. It is designed to safeguard the claims of clients against the ICF members through compensation, if preconditions have been met. It is not necessary for clients to be separate citizens, since foreign clients living in Cyprus are also covered. The maximum amount of compensation in the ICF is €20,000 – irrespective of how many accounts are held, or the currency that is used.
- Segregated Accounts – segregated accounts ensure that if a Forex company goes insolvent, the client will not lose his/her investment in the company. This is ironclad with regulated brokerages.
There are many services offered by regulated brokerages over non-regulated FX brokerages. We have listed 5 of them above, and these are the most important components of Forex trading activity. Unregulated brokers make spurious claims about guaranteed returns on FX trading activity, perhaps even offering generous leverage, margin and promotional offers to clients. These often come at a cost – the clients cannot cash out, or the trading platforms do not close out positions at the required trading values. The biggest pitfalls with unregulated brokerages include their unwillingness to pay out, faulty trading platforms, shoddy customer service, and non-compliance with any legal framework. As a blanket rule, UK clients are advised to avoid all unregulated Forex brokers.
How to Find Regulated Brokers
There are several ways to find fully licensed and regulated brokers, including the following:
- Conduct your own research at the FCA, CYSEC, BaFin, FSA, ASIC etc. and find the listings of licensed Forex brokers with these regulatory agencies
- Use reputable Forex comparison platform such as com. This company has already conducted the legwork for clients wanting to trade Forex online. It is an internationally credible platform for reviewing the services of regulated Forex brokerages.
- Crosscheck a broker’s claims of licensing and regulation with FCA, BaFin, CySEC and other authorities with the information presented on site (license #) and regulatory authority.
How to Get Your Money Back From a Regulated Broker
If you are trading with a regulated broker, chances are you are already one step ahead of the game. Regulated brokers work hard to maintain their licensing and regulation status with the respective agencies in question. Contact the customer support department via the live chat, email, telephone, fax or land-based contact information. Speak to the customer service team about wanting to get your money back from them. Always ask to speak to somebody who can help you with your query, such as a supervisor, or an account manager. If the regulated broker stonewalls and refuses to cooperate – you have recourse.
Contact the regulatory agency in question such as CySEC, the FCA, FSA, BaFin or ASIC and lodge a formal complaint with them against the company. You may be required to provide paperwork (emails, registrations, bank statements, account balances) to the regulatory agency to validate your query. Once you have done this, you should have no problems. Note that many regulated brokerages jealously safeguard their integrity on review sites such as Top8ForexBrokers, TrustPilot and others. If you do not get a satisfactory response in a reasonable time, it is always a good idea to publicly air your grievances about the company.
How to Choose the Best Forex Broker for You
Your decision to trade Forex online is an important one. Always choose a reputable Forex broker. We have listed the most important elements of credible brokerages, including licensing and regulation. If you are trading in the UK, or in the EU, always choose a Forex broker that is licensed and regulated in your jurisdiction. You certainly don’t want to be trading with a Forex broker that is not allowed to offer its services to you. We strongly recommend that you compare brokers based on the tips that we have provided as a complimentary service to you at Top8ForexBrokers. Read our expert commentary to understand how to select the best Forex broker for your needs.