Is the forex broker regulated and licensed?
Is the firm licensed, regulated, and authorized to operate as a forex broker in your country?
Have you noticed the emphasis on “where you live”?
Verifying a broker’s regulatory status isn’t enough; you also need to know which regulatory agency it is registered with and whether the jurisdiction that the regulatory agency controls covers the country where you live!
The regulations and legislation that forex firms must obey are referred to as forex market regulation.
The goal of regulation is to keep you safe from hidden financial risks, abusive activities such as price and order manipulation, and fraud.
In other words, regulation attempts to protect you against dishonest brokers who engage in shady behavior.
There is no single global agency in charge of policing the vast 24/5 FX market.
Instead, accountability is mostly assigned on a country-by-country basis. Most nations have a regulatory authority that establishes a framework of regulations and criteria that retail forex brokers must follow.
These laws include registering with the regulatory authority and receiving a license, as well as undergoing regular audits and reviews to verify that companies are in compliance with the regulatory standards.
Each currency regulatory authority operates within its own jurisdiction, and regulation and enforcement differ greatly between countries.
In summary, regulatory requirements are established that ALL forex brokers operating within their jurisdiction must follow. If a forex broker fails to comply, the regulating body has the authority to levy penalties and take disciplinary action. These fines can be enormous, providing a strong incentive for businesses to follow the law.
If sanctions are ineffective, the regulatory body has the authority to cancel the firm’s operating license if the regulatory infractions are exceptionally severe or if the company fails to satisfactorily implement adjustments to prevent future violations.
If this occurs, the forex broker will be unable to conduct business in this jurisdiction because it will be operating unlawfully and without a license.
Forex regulations fluctuate from one country to the next. This means that not all regulatory agencies adhere to the same set of rules or provide the same level of financial security.
Each regulatory agency has its own set of regulatory criteria as well as its own region of jurisdiction. Not only do regulatory standards fluctuate from country to country, but so does enforcement of these rules! You can make all the rules you want, but if you don’t enforce them, the regulatory agency is just a paper tiger.
Apart from paper tigers, not all regulatory organizations are trustworthy. Some regulatory bodies in ostensibly “offshore” nations are basically “rubber stamping” offices.
There are many levels of “strictness” in jurisdictions.
The United States and Japan, for example, are thought to have the most severe regulatory bodies.
Essentially, the “stricter” the jurisdiction, the more the protections for individual traders, but the greater the expense for the broker to operate in that country.
This is because of more strict requirements such as:
- Having a local physical office and staff.
- Requiring a large amount of money up front just to even start the business.
- Plus additional money set aside to avoid going bust and be able to pay out when their customers win.
- Regularly submitting reports to verify compliance with all license requirements.
Not only is there usually a large upfront cost, but license charges must also be maintained on a yearly basis.
Despite the additional compliance costs and inconveniences, respectable brokers prefer to register and be regulated in harsher jurisdictions since it boosts their credibility and develops confidence with their consumers.
But let’s be clear. A regulated broker does not immediately imply that you may trust it.
“Strict” Forex Jurisdictions
Here’s a map of jurisdictions supervised by regulatory authorities that are typically regarded as strict:
|United States||Commodity Futures Trading Commission (CFTC)|
National Futures Association (NFA)
|Japan||Financial Services Agency (FSA)|
|United Kingdom||Financial Conduct Authority (FCA)|
|Canada||Investment Industry Regulatory Organization of Canada (IIROC)|
|EU||Cyprus Securities and Exchange Commission (CySEC)|
|EU||Malta Financial Services Authority (MFSA)|
|Singapore||Monetary Authority of Singapore (MAS)|
|Hong Kong||Securities and Futures Commission (SFC)|
|Australia||Australian Securities and Investments Commission (ASIC)|
|New Zealand||Financial Markets Authority (FMA)|
Most forex brokers who are regulated in rigorous jurisdictions are less likely to be scams.
“Questionable” Forex Jurisdictions
Here’s a map of jurisdictions where appropriate customer protection is unclear. Either the jurisdiction is “lightly” overseen by a regulatory agency with minimum requirements (red) or there is no supervision at all (black) and brokers are allowed to self-regulate.
|Belize||Belize International Financial Services Commission (IFSC)|
|The British Virgin Islands (BVI)||BVI Financial Services Commission (FSC)|
|Cayman Islands||Cayman Islands Monetary Authority (CIMA)|
|Kenya||Capital Markets Authority (CMA)|
|Mauritius||Financial Services Commission (FSC)|
|South Africa||Financial Sector Conduct Authority (FSCA)|
|Saint Kitts and Nevis|
|Seychelles||Seychelles Financial Services Authority (FSA)|
|St. Vincent & the Grenadines (SVG)||Financial Services Authority (FSA)|
|Vanuatu||Vanuatu Financial Services Commission (VFSC).|
There are a lot of little tropical islands on the map that are more well-known as expensive tourist destinations with their luxury beach resorts.
These islands are known as “offshore jurisdictions,” which are countries with little or no taxes and corporate laws that optimize financial secrecy and limit governmental intrusion for both individuals and corporations.
Why do forex brokers prefer to trade “offshore”?
- Fast and cheap to start a business
- Minimal capital requirements
- Minimal or no taxes
- No need to report activities to the authorities
- No need for a local physical office and staff
Forex brokers like to set up shop in these offshore jurisdictions to avoid what they may consider overly restrictive rules and hefty compliance expenses in their home country.
Essentially, the cost and difficulties of establishing a company and functioning as a forex broker are substantially lower.
Be Wary of Unlicensed Forex Brokers
If you Google “forex broker,” you will most likely come across a plethora of organizations that operate as forex brokers without a license.
Unlicensed forex brokers argue that operating without a license allows them to drastically reduce their operating expenses and leave them with more available funds to spend on the actual business, such as marketing and promotion to acquire new customers, rather than having to spend a lot of money (and time) to obtain a license and comply with all the rules and requirements.
I’m not sure about you, but I find it difficult to trust a forex broker that begins with $1,000 in capital, has no license, no real office or staff, and is solely an internet company.
A corporation that is not licensed is not governed by any agency. This means it is not required to follow consumer protection standards including preserving customer cash, providing clear information and openness about how it executes trades, and resolving customer issues and complaints.
They may claim improved trading circumstances, such as deposit bonuses, “tight” spreads, and absurdly high leverage.
However, we recommend avoiding them because the likelihood of these firms being scams is significant. If you are subjected to unfair treatment, such as trade manipulation resulting in losses or the inability to withdraw your cash, you are not protected by any specific law or regulation.
YOU WILL BE ALL ALONE.
Because the company is not regulated, you will not have access to complaints procedures or compensation plans if something goes wrong.
There will be no regulatory agency to which to turn to handle issues fairly and impartially, with the authority to make things right.
Why should you pick a regulated Forex Broker?
A regulated forex broker must adhere to the requirements established by the regulating organization. This helps to ensure that the forex broker’s dealings with you are ethical and fair.
You can complain a regulated broker to its regulating agency if you are dissatisfied with the level of service or believe you are being scammed by your broker.
While the regulatory agency does not normally get involved in disputes between companies and their customers, it will investigate any cases of fraud or consumer abuse.
If the broker is found guilty, the regulatory agency can levy heavy fines, cancel their license, and possibly permanently bar them from operating in the country.
Retail traders can have some trust that while trading with a forex broker, they are treated fairly and ethically because forex brokers are required to follow a set of rules specified by forex regulatory organizations.
Finally, why would you not trade with a licensed forex broker? Why would you choose a broker who avoids being subject to severe regulatory oversight?
We’re not arguing that every unregulated broker wants to steal your money, but considering the retail forex industry’s history of fraud, why take the risk?
How to Verify A Broker’s Regulatory Status
Every forex broker who is licensed and authorized to operate by their regulatory organization receives a unique ID number.
Regulated brokers are required to prominently show their regulatory information on their website, so you should be able to clearly identify their ID number (usually at the bottom of every page).
A broker may claim to be based in one jurisdiction but is actually based in another. The corporation could be impersonating another company’s ID number or, worse, completely inventing a bogus ID number.
This is why it’s critical to VERIFY this ID number on the website of the relevant regulatory agency. To assist traders like you in verifying a forex broker’s regulatory status, most regulatory agencies provide an online database that you may visit to determine whether a broker is genuinely regulated by the relevant agency.
The website of a regulatory body should include information about a broker, its owners and corporate leaders, a brief history of its operations, and any regulatory actions taken against the broker owing to noncompliance issues or customer complaints.
A forex broker, for example, may pretend to be licensed to operate in the United Kingdom by showing an FCA Register Number. Rather than simply believing it, you should go to the FCA’s website and verify their FCA license for yourself.
Verification can be accomplished by conducting a short search on the FCA’s website. You can perform a name or number search to see if the regulatory information on the broker’s website matches.
If the broker is listed, make sure the contact information is correct and matches what is on the company’s website.
There are scam brokers who pretend to be the listed company. This is why it’s critical to utilize the registered contact information to confirm you’re dealing with the legitimate company before doing business with them.
If you have any doubts about a broker’s regulatory status, you should contact them immediately and inquire about their current regulatory status. If you do not receive a response, this is a red flag.
Trade with a Broker that Has a Physical Office in Your Country
If you want to keep your money safe, trade with a regulated broker who is physically located in the country where you live.
Using forex brokers who operate outside your country and in foreign countries is not always legally obliged to maintain regulatory licenses. Particularly in offshore jurisdictions where governance is poor or non-existent.
If the regulatory agency, the broker, and you are all under the same jurisdiction, you will be better protected since you will be able to report your broker to the regulatory agency if you believe you are being duped.
If the broker does not have a physical presence in your country and/or is not regulated there, you will most likely have no legal recourse if something goes wrong.
Test Drive Your Broker
So you’re interested in a forex broker and have done your homework BEFORE establishing an account.
You open a live account because the broker appears to be trustworthy. You most likely have a specific sum in mind to deposit. Don’t do it right away.
Take the broker for a “test drive” first:
- Make a SMALL deposit.
- Open and close a couple of SMALL trades.
- Request to withdraw your entire account balance.
- Confirm that you’ve received the funds.
This allows you to see how simple it is to get money into and out of a broker.
How long did the withdrawal take to process? It should not take more than 24 to 48 hours. Be wary if it takes so long that you have to follow up and badger the broker about your withdrawal request.
If everything goes well and you’re happy with the test drive, you can then deposit a greater amount.
By the way, if the broker begins calling you to “urge” you to put additional funds into your trading account before or after you request the withdrawal, that’s not a good indicator. It’s great if the broker contacts you to see if you need assistance with their trading platform, but you should question why they’re already attempting to encourage you to deposit more money and trade more.
Next Lesson: What are you actually Trading in Forex?