Forex regulators are the main authority when it comes to controlling and monitoring the activities of forex brokers. A popular opinion is that since forex is not a centralized market, there is no central authority. This is grossly incorrect.
If you look at the stocks and futures markets for example, there are only central authorities within the respective jurisdiction. In the forex markets, where trading is over the counter, such regional authorities are key to maintaining the integrity of the markets.
Hence, one can find many regional (country-specific) forex regulators. However, not all of them are created the same. Some forex and CFD trading regulators are more stringent than others. Thus, even if a forex broker is regulated, it does not mean that they are all the same in aspects of integrity and transparency.
While the forex markets continue to grow, over the years, forex brokers are increasingly required to obtain a trading license to operate their businesses. Some forex brokers tend to get away with it, but not for long. Besides, having a forex license is also a matter of pride, especially if the forex broker wants to create a long term reputation in the industry.
As a beginner in forex trading, it can get increasingly confusing. There are many websites that promote forex brokers and within these, it can be confusing for one. You never know which forex regulator is better or which regulator to choose.
This article aims to clear the confusion and give the reader an insight into how forex and CFD brokers are regulated. You will also get some insights into the different forex regulators around the world and their differences.
How does forex regulation work?
Forex regulators are national entities or authorities and they broadly deal with a host of other financial market regulations. These authorities or institutions have local jurisdictions to ensure market stability. Depending on their powers, sometimes, regulators oversee the entire financial markets, covering stocks and derivatives.
No matter what, the main activities of these financial regulators (in a forex CFD context) are to:
- Ensuring that the forex broker complies with the regulations laid out to obtain the license
- Maintaining transparency of the market-related business activities of the broker
- Conduct checks and due diligence periodically to ensure the broker complies with the regulations
Therefore, the work of the financial regulator is not just to issue licenses, to allow a business to operate a forex brokerage business legally, but also to check to ensure that the broker follows the rules.
Hence, financial regulators who issue licenses also revoke them in certain conditions, after the forex broker has failed to comply even after having received verbal or written warnings. Moreover, the financial regulators as mentioned have local jurisdiction.
Hence, for example, a license issued by the Australian Securities and Investment Commission has jurisdiction over Australia only. This ensures that forex brokers registered in Australia comply with ASIC’s law. The benefit of the regulation entitles the legal residents of Australia to recourse to action if required.
On the other hand, if the forex broker has clients for example from New Zealand, then ASIC’s laws would not apply there. In order to legally operate in New Zealand, the forex broker must also be registered on the FSP and hold a derivative issuer license granted by the FMA.
Benefits of a licensed and regulated forex broker
The main benefit of having a trading account with a licensed or regulated forex broker is that there is some sort of adherence to the law of the land. Therefore, the forex broker will not get away with malpractice or manipulation.
Depending on the regulator, the benefits can vary. But here is a broad summary of some of the benefits of trading with a licensed or regulated forex broker.
- The forex broker is part of the national financial compensation fund which the regulator oversees
- The financial regulator acts as the intermediate to resolve disputes arising between the customer (trader) and the forex broker
- Auditing the forex brokerage’s business to ensure that the company does not manipulate the markets and adheres to certain laws laid out
- Warning or in extreme cases, revoke the trading license that was issued to the forex broker
What is the need for forex regulation?
The retail forex market is largely made up of investors who are not financially savvy. It is not surprising then, that many beginners in forex end up losing money within the first few months of trading.
Yet, despite the risks, traders continue to sign up, deposit their trading capital and trade for the fact that they can make money from the markets. This leaves a lot of grey areas where forex brokers can entice gullible customers.
A forex regulator ensures that the forex broker they regulate adheres to full transparency. This is the reason why forex brokers nowadays carry the disclaimer about the risks involved with Forex CFD trading. Furthermore, a forex broker is also restricted in its advertising and marketing policies.
By gaining a forex license, the forex broker is essentially setting up a legitimate business. They need to have a physical address (in many jurisdictions) and a locally appointed head of the companies. The forex brokerage owners are also required to submit their personal details, business capital and so on to the regulator.
This gives a higher level of trust to regulated forex brokers rather than brokers who set up a business with the intention to scam their customers. The forex broker must also submit period reports on their business activities.
In recent years, money laundering has also become a worldwide concern. Hence, regulated forex brokers are required by law to fully know the customer, before the trader can start trading. These checks and balances ensure that the forex broker you trade with is fully compliant with the local financial regulation laws.
Who are the major forex CFD regulators?
Just about every jurisdiction has some kind of an institution that is tasked to oversee the financial markets. There is no specific institution for the forex CFD markets in particular. The financial regulators operate under a wider umbrella of financial investing.
Depending on the financial regulator, the requirements can vary from one jurisdiction to another. Still, there are many forex brokers who are registered in one jurisdiction but are able to accept customers from most parts of the world. This is something that traders should consider.
It is better to trade with a forex broker that is licensed by the local financial regulator rather than trade with one who is licensed in another jurisdiction. Below are some of the most common financial regulators you will come across.
ASIC – Australian Securities and Investments Commission
The Australian Securities and Investments commissions or ASIC for short is known to be one of the best financial regulators when it comes to the forex markets. They are very stringent and consequently, brokers who receive an ASIC license are highly regarded.
ASIC issues licenses to both domestic forex brokerages as well as international brokerages.
BaFIN – The Bundesanstalt für Finanzdienstleistungsaufsicht (Germany)
The BaFIN is the financial regulator for Germany. Their main task is to ensure the market integrity for investment companies including forex brokerages registered in Germany. BaFIN is one of the common regulators that many European focussed forex brokerages use.
A BaFIN-issued license is more beneficial to a resident of Germany. Although with the European Union, it opens up the path for just about any resident in the EU to the same level of protection.
CySec – Cyprus Securities and Exchange Commission
CySec license is one of the most popular forex regulators around the world. In fact, just about any forex broker will have a license issued by CySec. Although this regulator had issues with integrity in the past, ever since Cyprus joined the EU, CySec has become more stringent.
More importantly, a CySec license requires that the forex broker have a locally registered office in Cyprus. It is not surprising then that many of the forex brokerages have an office in Cyprus, which is Europe’s largest forex hub.
FCA – Financial Conduct Authority (United Kingdom)
The UK’s FCA is another big name among forex regulators worldwide. While the FCA had some clout when the UK was part of the EU, it has become more independent ever since. FCA-licensed forex brokers are also highly regarded.
However, since Brexit, an FCA-licensed forex broker is more suitable for traders who are domiciled in the UK rather than elsewhere.
FINMA – Swiss Financial Market Supervisory Authority
The FINMA is the national financial regulator for Switzerland. There are only a few forex brokerages that have the FINMA license and as a result, it is not that common. This can partly be because the costs are somewhat higher relative to a license from CySec for example.
Financial Sector Conduct Authority – FSCA (South Africa)
The FSCA from South Africa is the financial regulator of the region. It is more appropriate that traders from around Africa look for an FSB-licensed forex broker. Not much is known about the regulator despite the region boasting of a significant number of forex traders.
The FSCA is the successor to the previously known FSB or the Financial services board. In recent times there have been criticisms on the way FSCA operates.
Financial Services Commission – BVI
The British Virgin Islands, in the forex world, is known to be an offshore centre. Many forex brokerages set up shop in the BVI due to lower entry requirements to qualify for a forex license. Hence, you will see that many US focused forex brokerages set up offices in BVI.
This entitles them to somewhat lax restrictions such as the use of higher leverage and so on. Typically, a BVI-licensed forex broker has lower deposit requirements as well. Given that the license is for the BVI jurisdiction, the BVI-registered forex brokers target a worldwide audience.
Traders who like to trade on higher leverage and want lower transaction costs for example prefer to use BVI-based forex brokerages.
Financial Services Commission (FSC) – Mauritius
The Financial services commission of Mauritius is another popular forex regulator. Although somewhat offshore, a Mauritius license is somewhat better than BVI license for example. Still, when it comes to jurisdiction, the FSC is entitled only to the local place.
Some forex brokers tend to have multiple licenses and in this case, holding the FSC licence from Mauritius is an added advantage to have. But when it comes to being stringent with the forex brokers, the FSC doesn’t really rank that high.
Financial Markets Authority (FMA) New Zealand
Financial Markets Authority (FMA) is the national regulator of New Zealand. Similar to ASIC, the derivative issuer (DI) license is also hard to obtain. More importantly, a DI license holder should have a physical office in New Zealand.
There are due diligence, compliances, and checks and balances put in place by the FMA to hold a DI license. However, in many cases, brokers who offer CFDs on forex who have an ASIC license, do not focus much on the FMA DI license. For New Zealand-based forex traders, trading with a licensed derivative issuer is highly beneficial (compared to a broker regulated by ASIC).
MFSA – Malta Financial Services Authority
Malta is another European island that is similar to Cyprus. However, unlike CySec, MFSA is a relatively new entrant. This comes from the fact that Malta was more focused on the online gambling sector.
The MFSA has learned from its experiences in the online gambling sector in Malta and hence is a strong contender to CySec. An MFSA license ensures jurisdiction for the island of Malta, but since it is part of the EU, it covers the wider European Union as well.
Newer brokers tend to have the MFSA with just a handful having the MFSA license in addition to CySec’s license.
Forex CFD regulators – In Conclusion
Forex regulators are essential to root out the bad apples from the basket. Given the online nature of the retail forex trading business, it only takes a few missteps to scam a retail forex trader.
Forex regulators hence play a crucial role when it comes to maintaining market integrity and also ensure to set the bar high. This allows for only serious businesses to consider setting up a retail forex trading business.
From a customer perspective, it is imperative to check that the forex broker you are interested in legitimately holds the necessary license for that jurisdiction. The customer should also do periodic checks to ensure that the forex broker is compliant with their regulators.
