Is the forex broker licensed and regulated?
Is the company licensed, regulated, and authorized to operate as a forex broker where you live?
Notice the extra emphasis on “where you live”?
It’s not enough to verify a broker’s regulatory status, you need to know which regulatory agency it is registered with and whether the jurisdiction that the regulatory agency oversees covers the country where you live!
Forex market regulation refers to the rules and laws that firms operating in the forex industry must follow.
The purpose of regulation is to protect you from undisclosed financial risk, abusive practices like price and order manipulation, and fraud.
In other words, regulation tries to protect you from shady brokers doing shady things.
There is no single global body governing the forex market to police the massive 24/5 market.
Instead, the responsibility mostly falls on a country-by-country basis. Most countries have a regulatory authority that lays down a framework of rules and standards that must be followed by retail forex brokers.
These rules include being registered and licensed with the regulatory body, and undergoing regular audits and reviews to ensure that companies comply with the regulatory requirements.
Each forex regulatory body operates within its own jurisdiction and regulation and enforcement vary significantly from country to country.
In short, regulatory requirements are established where ALL forex brokers under their jurisdiction must comply with.
If a forex broker doesn’t comply, the regulatory body has the power to issue fines and disciplinary action. These fines can be substantial and provide a strong incentive for companies to operate within the law.
And if fines don’t work, the regulatory body can ultimately revoke that company’s operating license should the regulatory violations be particularly severe or if the company doesn’t satisfactorily implement changes to prevent future violations.
If this happens, the forex broker can’t do business in this jurisdiction anymore since it would be operating illegally without a license.
Forex regulations differ from country to country. This means that not all regulatory agencies follow the same kind of regulations or offer the same type of financial protection.
For each regulatory agency, they have its own specific regulatory requirements and area of jurisdiction.
Not only do the regulatory requirements differ, but the ENFORCEMENT of these requirements also differs from country to country!
You can create all the rules you want, but if you’re not going to enforce them, then the regulatory agency is basically a paper tiger.
A paper tiger is a term that refers to something or someone that claims or appears to be outwardly powerful or threatening but is actually inwardly weak or ineffectual.
Aside from paper tigers, not all regulatory agencies are credible. Some of the regulatory agencies in so-called “offshore” jurisdictions are essentially nothing more than “rubber stamping” offices.
Regarding jurisdictions, there are different levels of “strictness”.
For example, the U.S. and Japan are considered to have the most stringent regulatory agencies.
Essentially, the “stricter” the jurisdiction, the more protections that individual traders have, but the most costly it is for the broker to operate in that jurisdiction.
This is due to stricter requirements such as:
- Having a local physical office and staff.
- Requiring a large amount of money upfront just to even start the business.
- Plus additional money is 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 huge upfront cost but licensing costs also have to be maintained annually.
Even with all the added compliance costs and headaches, reputable brokers still choose to register and be regulated in stricter jurisdictions since it improves their credibility and builds trust with their customers.
Let’s be clear though. A broker that is regulated doesn’t automatically mean you can blindly trust it.
“Strict” Forex Jurisdictions
Here’s a map showing jurisdictions that are supervised by regulatory agencies that are generally considered 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 regulated in strict jurisdictions are less prone to scams.
“Questionable” Forex Jurisdictions
Here’s a map showing jurisdictions that are questionable with regard to adequate customer protection. Either the jurisdiction is “lightly” supervised by a regulatory agency with minimal requirements (red) or has no supervision at all (black) and allows brokers to self-regulate themselves.
|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).|
On the map, you’ll notice a lot of small tropical islands that are more well-known as expensive tourist destinations with their fancy beach resorts.
These islands are known as “offshore jurisdictions” which are low or no-tax countries with corporate laws that maximize financial privacy and minimize regulatory interference for both individuals and corporations.
Why do forex brokers like to go “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 get around what they may consider overly restrictive regulations and high compliance costs in their own countries.
Basically, the cost and difficulty of setting up a company and operating as a forex broker are much lower.
Be Wary of Unlicensed Forex Brokers
If you Google “forex broker”, you’ll probably come across many companies that operate as a forex broker without a license.
An argument that unlicensed forex brokers make is that instead of having to spend a lot of money (and time) to obtain a license and comply with all the rules and requirements, 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 on marketing and promotion to acquire new customers. 🤔
I don’t know about you but it’s hard to trust a forex broker that started up with $1,000 of capital, has no license, has no physical office or staff, and is strictly an online operation.
An unlicensed company is not regulated by any regulatory agency. This means that it is not bound to abide by consumer protection rules such as safeguarding customer funds, providing clear information and disclosure of how it executes trades, and resolving customer issues and complaints.
They may promise better trading conditions, including deposit bonuses, “tight” spreads, and ridiculously high leverage.
However, we recommend avoiding them since the probability that these companies are scams is high.
If you experience unfair treatment, such as manipulation of trades that results in losses or the inability to withdraw your funds, you will not be protected by any specific law or regulation.
YOU WILL BE ON YOUR OWN. 😭
Due to the company not being regulated, you wouldn’t have access to complaints procedures or compensation schemes in the event that something going wrong.
There will be no regulatory agency to turn to resolve disputes fairly and impartially and have the power to put things right.
Why should you pick a regulated forex broker?
A regulated forex broker means that it must comply with standards set by the regulatory agency. which helps ensure that the way the forex broker conducts business with you is ethical and fair.
For example, in the U.S., a legit forex broker must be registered as a Retail Foreign Exchange Dealer (RFED).
If you are not satisfied with the level of service, or if you think you’re being scammed by your broker, you can report a regulated broker to its regulatory agency.
While the regulatory agency usually does not get directly involved in any conflict between a company and its customer, it will investigate any instances of fraud or consumer abuse.
If found guilty, the regulatory agency can issue big fines, revoke their license, and even permanently ban the broker from operating in the country.
By requiring forex brokers to operate within a set of rules as defined by the forex regulatory agencies, retail traders can have some confidence that when trading with the forex broker, they are treated in a fair and ethical manner.
Lastly, why wouldn’t you trade with a regulated forex broker? Why would you choose a broker who deliberately avoids being under a strict regulatory agency?
We’re not saying that every unregulated broker wants to cheat you out of your money but given that the retail forex industry has a history of being prone to fraud, why take the chance?
How to Verify A Broker’s Regulatory Status
Every forex broker who is licensed and authorized to operate by their regulatory agency receives a unique ID number.
Regulated brokers are required to display their regulatory information prominently on their website so you should be able to easily spot their ID number (usually at the bottom of every page).
A broker may claim to be based out of a specific jurisdiction but is actually lying. The company could be falsely claiming another company’s ID number or worse, totally making up a fake ID number.
This is why it’s important to make sure to VERIFY this ID number on the official regulatory agency’s website.
To help traders, like you, verify the regulatory status of a forex broker, most regulatory agencies maintain an online database that you can access in order to verify whether a broker is truly regulated by the specific agency.
A regulatory agency’s website should provide information about a broker, its owners, and company executives, a brief history of its operations, and any regulatory actions that were taken against the broker due to non-compliance issues or customer complaints.
For example, a forex broker may claim to be licensed to operate in the U.K. by displaying an FCA Register Number.
Rather than just blindly believe it though, you should visit the FCA’s website and verify their FCA license yourself.
Verification can be done by performing a quick search on the FCA’s website. You can search by name or by number and check if the regulatory information on the broker’s website matches.
If the broker is listed, make sure to verify the contact details listed are what’s listed on the company’s website.
There are scam brokers who pretend to be the listed company. This is why it’s important to use the contact details that are registered to confirm you’re dealing with the actual company before doing business with them.
If you’re unsure about a broker’s regulatory status, contact the broker directly and inquire about their current regulatory status. If you don’t get an answer, that’s a red flag.
Trade with a Broker that Has a Physical Office in Your Country
If you want your money to be safe, trade with a regulated broker that physically operates in the country you live in.
Using forex brokers who operate outside your country and in foreign jurisdictions are not always legally required to maintain licenses with regulatory bodies. Especially in offshore jurisdictions, where governance is weak or doesn’t exist.
If the regulatory agency, the broker and you are all in the same jurisdiction, you will be better protected because you can report your broker to the regulatory agency if you feel you’re being cheated.
If the broker doesn’t have a physical office in your country and/or isn’t regulated in your country, you’re most likely going to find no legal recourse if something goes wrong.
Be careful of “regulatory arbitrage“. This refers to forex brokes attempting to benefit from differences in regulation between jurisdictions. For example, a forex broker operating in a strict jurisdiction may establish a separate company (subsidiary) under the same brand in an offshore jurisdiction that it perceives has more lenient regulatory requirements. The broker then direct its customers to transact through that subsidiary. For example, the broker may flaunt an EU or UK license to assure you it’s “safe” but then open your account with the offshore subsidiary. If you open an account with a broker, make sure the account is opened under the jurisdiction that you specify. Don’t let the broker choose for you or you might be giving up your regulatory protection.
“Test Drive” Your Broker
So you’re interested in a forex broker and BEFORE opening an account, you’ve done your research.
The broker looks safe so you open a live account.
You probably have an amount in mind that you want to deposit.
Don’t do it just yet.
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 test how easy the process is to get money in and out of a broker.
How long did it take to process the withdrawal? It shouldn’t take more than 24-48 hours. If it takes so long that you actually have to follow up and bug the broker about your withdrawal request, beware.
If everything goes well though and you’re pleased with the test drive experience, you can then deposit a larger amount.
By the way, if you start receiving phone calls from the broker trying to “encourage” you to deposit additional funds into your trading account either before or after you request the withdrawal, that’s not a good sign.
It’s fine if the broker is reaching out to see if you need help using their trading platform, but you should wonder why they’re already trying to get you to add more money and trade more.