As any trader can tell you, one of the most important requirements for a broker is regulation. A broker that is not regulated can, by definition, operate outside of the law. There are no protocols in places to keep the broker in tow. Similarly, there are very few routes for a client to take with regards to dispute resolution when a broker is unregulated.
Apart from the security element that comes with a regulated broker, there is a certain authenticity that is conferred by a regulatory stamp. It means that the broker has gone to great lengths and investments to secure a particular licence. They also would have to meet strict standards for best practices.
However, when it comes to broker regulation, not all are created equal. It is also important to understand your client rights based on the regulator in question.
Regulations in the EU
As most know, the E.U. is made up of a collection of member states. Each of these member states have their own financial regulatory agency. Due to a rule called “passporting” through the MiFID directive, a company that is regulated by an agency in an E.U. member state is permitted to provide those products to another member state’s citizens.
The MiFID (Markets in Financial Instruments Directive) was put forward by the European Parliament in November 2007. It was created to enhance consumer protection and synchronise individual regulatory agencies efforts. Ever since the directive was signed into law it was the cornerstone of the European Commissions Financial Services Action plan.
Given the MiFID regulations, brokers usually only choose to be regulated in one member state as this could greatly reduce their cost of doing business. What most brokers currently do is to register within Cyprus and obtain a regulatory stamp from CySec.
Why regulate in Cyprus
There are a number of reasons that a broker may want to obtain regulations in Cyprus. Most of these are for perfectly legitimate business and tax purposes that are better suited to the nature of their business. For example, in Cyprus the corporate tax rate is 10%. Compared to other member states, this is one of the lowest tax rates in the E.U.
Similarly, the cost of setting up an office in Cyprus is much cheaper than it is in other cities such as Paris or London. These are factors that most businesses find favourable and generally try and obtain. It can also be a positive for the traders who use the broker as costs are greatly reduced.
Of course, there are a number of other factors that are more appealing for a broker about Cyprus including the availability of administrative staff as well as being well located to deal with global time zones.
What is CySec?
Cysec is the Cyprus Securities and Exchange Commission. They are in charge of regulating markets in Cyprus and were set up under the Securities and Exchange Commission law. The mission of CySec is to make certain that regulations are in place to police the binary options and Forex industry.
CySec issues regulatory licenses to qualifying investment firms and brokers with their license. They also fine particular brokers for breaching rules and regulations of the agency. These fines are usually quite extensive and are often seen as a strong deterrent. CySec also gets involved in investigations of broker misconduct and takes trader reports into account.
CySec was one of the first Eurozone regulatory bodies which established rules and classifications over Binary Options. In other jurisdictions they were mostly considered an OTC product and were self-regulated. This was one of the positive steps by CySec in the right direction.
What are the CySec Rules
Before a broker can obtain a license, they need to meet a number of requirements. They are also required to maintain these protocols in place if they wish to retain their license for the long term.
- Segregated Accounts According to CySec, a Forex or Binary Options broker is required to hold the funds of the Investor in a segregated trust account. This means that the funds are held independently by a third party that are not part of the broker’s other business funds. This benefits the client as their funds are kept safe from the adverse effects of scams and broker bankruptcy.
- Open Operations. Brokers who want to obtain the CySec regulation have to make certain that they open their books and operations to the CySec investigators. This will mean that brokers are required to implement general business best practices before they open their operations to the regulator
- No Investment Advice. Recently, CySec made the step of outlawing investment advice from the broker. This was the right step to take as a broker should not be able to provide investment or trading advice to the client.
- No Signing Bonuses. This was another recent step to have been taken by CySec. Brokers used to be able to tie clients into the platform using singing bonuses. These were generally very hard to redeem and clients were stuck unable to withdraw.
- No Outsourcing of Sales Operations. Another tactic that brokers tended to use previously was to outsource their sales operations to call centres in far off places. This led to a lack of oversight on the operations by the broker.
- Sufficient Buffer Funds. The broker is also required to show that they have sufficient funds available to operate the business. This investment capital can assure the regulator that the broker is indeed serious about maintaining their business for legitimate purposes only.
Finding Regulated Brokers
We here at FXaxe have a long list of brokers who are regulated by CySec. If you were researching a broker that you came across and wanted to determine whether they were indeed regulated by Cysec you could visit the official CySec website and search for the broker in question.
The companies on this list are the holding companies of the broker. This information is usually found in the terms and conditions of the website. If this cannot be easily found then you can indeed ask your broker and they should be able to assist you either with the holding company name or the broker licence.
Regulations in the U.K.
Given that the U.K. has now officially triggerred Article 50 of the E.U. treaty and is leaving, there are many things that are uncertain. Indeed, one of them appears to be the regulatory oversight for those brokers who were previosuly “passporting” in broker services to the UK from other E.U. member states.
Thhe FCA currently does regulate CFD and Forex brokers. These are generally quite extensive and require the broker to have a number of internal protocols as well as extensive financial resources.
The requirements for a Forex broker include background checks on the directors of the company, a minimum number of staff in the office, at least 500k in a bank account in reserve funds. They also have to have a dedicated compliance director as well as recorded lines.
It is indeed safe to say that for Forex and CFD brokers the FCA has some of the strictest rules globally. This is the main reason why a number of the world’s biggest forex brokers including IG and FXCM are regulated by the FCA
FCA Regulations for Binary Options
Currently, the FCA does not regulate Binary Options and the U.K. either treats them as an OTC product or a gambling product. The former is usually the realm of Investment Banks and the latter the U.K. gaming commission.
However, even before the UK’s vote to leave the E.U. passed, there has been talk that the FCA is examining solutions to regulate the Binary Option brokers within the UK. Indeed, in a recent announcement the FCA has stated that they are “consulting on proposals to treat binary options as a financial rather than a gambling product”.
This will indeed provide more certainty to Binary Option traders who are based in the U.K. and indeed a number of other regions as the FCA stamp of approval is an added security.
Regulations in the USA
Forex brokers are regulated by the United States CFTC (Commodities and Futures Trading Commission). The CFTC oversees the NFA (National Futures Association) which is a self-regulated industry body. Retail Foreign Exchange Dealers with approval by the SEC or the CFTC are entitle to offer their services to U.S. residents.
Obtaining a CFTC licence is indeed one of the strongest signals to the market of the reliability of the broker. Apart from the strict measures that the CFTC puts in place for forex brokers, it is also quite active dealing with individual queries and complaints. If the claims put forward by the trader are indeed true, there are certain whistle-blowing fees paid.
CFTC Broker Requirements
As mentioned, the CFTC is quite strict when it comes to the rules that it has in place in order for a retail forex broker to obtain a license.
- Keep Proper Records. A CFTC regulated broker must keep all records of its business including financial reports and client communications as well as keep the CFTC updated on its position.
- Disclosure. A CFTC regulated broker must disclose its licence number clearly on its website and it must also be in good standing with the commission.
- Minimum Capital. The broker is required to hold a minimum investment level of $10 million. This must clearly be segregated from the broker’s other funds.
- Registration with Futures Commission. The broker is required to register with a futures commission merchant or a retail forex dealer.
- Adherence to FIFO. The First in First Out rule must be followed by Forex brokers regulated by the CFTC. This implies that Forex brokers must liquidate the older positions first when involved in multiple currency pairs.
- Hedging. Hedging is not allowed on Forex Trades and the regulated broker has to comply with this.
Regulations in Australia
Forex and Binary Options brokers in Australia are regulated by the Australian Securities and Investment Commission (ASIC). This regulatory body is in charge of all Australia’s corporate, investment and financial services providers. They are the regulator who protect consumers from brokers in Australia.
The ASIC was formed in 2001 by the ASIC Act and it is an independent Commonwealth Government Body. Its main mission is to instil confidence in the Australian financial markets as well promote confidence and informed participation by investors.
If a broker is regulated by ASIC then it has to be prepared to safeguard the integrity of the Australian financial markets by offering the best services to their clients. Investors are also entitled to dispute any claims and alert the ASIC departments of any noted fraudulent activities.
The Australian authorities are also strict enforcing their requirements that forex brokers who wish to provide their services to Australian clients have to be registered by ASIC. This is indeed why a number of forex brokers have chosen to be regulated by the Agency. Moreover, the regulatory requirements at ASIC are quite straightforward and easy to understand which is indeed preferable for the brokers.
ASIC is also quite strict when it comes to enforcing any breaches of trust. Another thing that is quite unique to ASIC is dedicated online resources for the consumer to confirm that the company that they are dealing with is indeed properly regulated with the agency. This is one of the only regulators that we currently know of that has this service and is accessed via MoneySmart.
Although ASIC appears to be ahead of the curve to warning consumers about potential risks prior to investing, they do not provide a service for clients to lodge complaints. ASIC only gets involved if firms are not compliant with their particular codes. If you are attempting to recover funds you would have to reach out to the Financial Ombudsman for adequate compensation.