Forex Trading like any other investments is never risk-free. Forex market is volatile and there is always a chance that things will not go as you have predicted. The currency movements are something you have no control over. However there are things that you can control in order to decrease your risk of losing the invested money.
One of the things that can protect your investment is financial authority your forex broker registered with. Regulated forex broker is under the watchful eye of the law. It has to meet and keep the financial standards set by the financial authority. Failing to comply with the rules of financial authority may result in either big fine or regulation membership cancellation. Therefore regulated forex brokers are much more reliable then those who aren’t supervised.
KEY TAKEAWAYS
- While investing has become safe, low-cost, and efficient for ordinary investors, some instances of brokerage fraud still do take place to fleece unsuspecting or greedy investors.
- There are several ways to check and see if your broker is legit. Always do your homework beforehand.
- Check the background of the firm and broker or planner for any disciplinary problems in the past, beware of cold calls, and check your statements for funny business.
- When in doubt, there are several routes to file complaints and seek restitution.
- FINRA is the best resource to use when checking on a broker’s status.
Regulated forex brokers openly and clearly state their financial authority on the website. If you have trouble locating this information, you should contact the broker support and request to know who their regulator is. Reviewing your broker regulator is not enough. It is wise to recheck that your broker is indeed registered.
Once you know the name of the financial authority you can simply search it online. Then all you have to do is enter the website and use their database to search your forex broker up. If the database is not available, you can always contact the regulator by email or phone and request information regarding your forex broker. This is just a precaution but why risk it when you can make sure that you are protected by law? When it comes to scammers you are responsible to protect yourself and the best weapon against scam is your knowledge.
It is important to make sure that the broker of your choice is regulated and registered in the supervisory body of a certain jurisdiction. Key financial regulatory centers like Cyprus, UK, and Australia usually have stricter policies in their regulatory enforcement to secure the integrity of the financial industry. Here, we will go deeper into what Forex regulation is, what significant role it plays in the safety of the clients’ overall trading experience, and of course how it is implemented by the regulators of the FX market.
Various Forex Regulation Authorities
Australia: Australian Securities and Investment Commission
Maximum Forex Leverage: 1:500
Australia is a very popular offshore venue for Forex / CFD traders, due to its mixture of very high maximum leverage, solid but flexible regulatory framework, and large number of ECN brokers. What prevents many brokers from seeking ASIC regulation is the far geographic distance that makes it difficult for brokers to operate in Australia.
Forex Brokers in Australia
Canada:
Investment Industry Regulatory Organization of Canada (IIROC)
British Columbia Securities Commission
Ontario Securities Commission
Maximum Forex Leverage: 1:50
Canada is not a popular venue for non-resident Forex traders due to its tough regulatory regime and very small number of Forex brokers. More details about Canada’s regulation can be found here.
Forex Brokers in Canada
Cyprus:
Cyprus Securities and Exchange Commission
Maximum Forex Leverage: 1:30
The Republic of Cyprus is a very popular offshore venue for Forex / CFD traders, due to its mixture of E.U. membership, very flexible regulatory framework, and very large number of brokerage houses plus full supporting infrastructure.
Denmark:
Danish FSA
Maximum Forex Leverage: 1:30
Denmark is not an especially strong venue for Forex and CFD trading but has always been the financial services hub of the Scandinavian nations. It does have one big name brokerage in Saxo Bank.
European Monetary Union:
Markets in Financial Instruments Directive
Maximum Forex Leverage: 1:30
France:
Banque de France
Autorité des Marchés Financiers
Autorité de Contrôle Prudentiel (ACP)
Maximum Forex Leverage: 1:30
France is not a strong venue for Forex and CFD trading, with most French traders preferring to use offshore brokerages.
Germany:
Federal Financial Supervisory Authority
Maximum Forex Leverage: 1:30
Germany is not a strong venue for Forex and CFD trading, with most French traders preferring to use offshore brokerages.
Hong Kong SAR:
Securities and Futures Commission
Maximum Forex Leverage: 1:500
Hong Kong is a very popular offshore financial center, especially for the Asian market, and is home to many Forex / CFD brokerages due to its combination of light regulation and good supportive infrastructure, while it remains a popular choice of venue for both domestic and offshore Forex traders.
India:
Reserve Bank of India
Maximum Forex Leverage: Zero
Forex trading is only legal for Indian residents if the base currency is Indian Rupees and the counterparty currency USD, EUR, JPY or GBP. Therefore, the domestic retail Forex industry in India is practically non-existent.
Indonesia:
Badan Pengawas Perdagangan Berjangka Komoditi
Maximum Forex Leverage: 1:200
Indonesia has a growing domestic Forex / CFD brokerage industry which has begun to recover from its initial scandals generated during its early, relatively unregulated days. However, many Indonesian resident traders still tend to seek offshore brokers, and Indonesian brokers have few offshore clients.
Italy:
Commissione Nazionale per le Società e la Borsa
Maximum Forex Leverage: 1:30
Forex and CFD trading remain popular in Italy although the relatively weak Italian economy has stunted the natural growth of the industry. Italian traders generally prefer Italian and Swiss brokerage houses.
Japan:
Financial Services Agency
Japan Investor Protection Fund
The Financial Futures Association of Japan
Japan Securities Dealers Association
Kanto Local Finance Bureau
Maximum Forex Leverage: 1:25
Forex trading has been very popular in Japan for a long time, but the market remains almost impenetrable to foreign brokers. It is a highly and tightly regulated market.
Malaysia:
Bank Negara Malaysia
Maximum Forex Leverage: Zero leverage
It is illegal for a Malaysian resident to trade Forex except at a regulated Malaysian bank or other similar financial institution. However, foreign investment is legal, so the law may in practice be at least a little grey, and many Forex brokers do serve Malaysian traders. Many Malaysians do hold accounts with offshore brokers, but Malaysian brokers do not attract offshore clients.
Forex Trading in Malaysia
Russia:
The Commission on Regulation of Financial Markets Participants Relationships
Maximum Forex Leverage: 1:50
Russia has a few brokers of note and has provided some of the most talented individuals who helped found the online trading industry in the 1990s. Unfortunately, due to a combination of scandals and financial overreach, the reputation of Russian brokers suffered, and Russia attracts much less of an offshore market than it used to.
Singapore:
Singapore Exchange
Monetary Authority of Singapore
Maximum Forex Leverage: 1:50
Singapore has an attractive combination of strong but reasonable regulation and a well-established reputation as a solid offshore financial center. Forex trading is very popular in Singapore, especially automated trading, and Singaporean brokers attract a considerable offshore market too.
Forex Brokers in Singapore
South Africa:
Financial Services Conduct Authority
Maximum Forex Leverage: 1:30
Forex has suffered from a very negative reputation in South Africa as it has been used as a cover in a few Ponzi schemes and other frauds, although these scams really had nothing essential to do with the Forex industry. The Financial Services Conduct Authority (which replaced the FSB as the primary regulator of Forex / CFD brokers in 2018) is getting more involved as a regulator and there are a number of respected brokerage houses in South Africa, as well as an increasingly entrepreneurial population looking for a profitable hobby. There is room for the industry to expand, but geographical and other factors mean that South Africa is likely to only become an offshore trading hub for other southern African nations.
Forex Brokers in South Africa
Spain:
Comisión Nacional del Mercado de Valores
Maximum Forex Leverage: 1:30
Forex trading is not very popular in Spain, nor is there much of a domestic Forex industry there. Many Spanish traders look to trade with Swiss Forex / CFD brokers.
Sweden:
Swedish Financial Supervisory Authority (Finansinspektionen)
Maximum Forex Leverage: 1:30
Forex trading is not very popular in Sweden, nor is there much of a domestic Forex industry there. Many Swedish traders look to trade either through Swedish banks, but here we are talking primarily about higher net worth individuals, or perhaps Saxo Bank in Denmark.
Switzerland:
Swiss Financial Market Supervisory Authority (FINMA)
Groupement Suisse des Conseils en Gestion Indépendants
Polyreg
Association Romande des Intermediares Financiers
Swiss Federal Department of Finance
Organisme d’autorégulation des Gerants de Patrimoine
Maximum Forex Leverage: 1:200
Switzerland is arguably the world’s oldest financial center, and with some pioneering Forex brokerages plus some interesting cutting-edge trading technology, Swiss Forex brokers have been extremely popular both domestically and for offshore traders, who have quite a lot of choice.
Turkey:
Capital Markets Board of Turkey (CMB)
Maximum Forex Leverage: 1:10
Turkey had a small but growing Forex industry which unfortunately fell into political disfavor due to the chronic devaluation of the Turkish Lira. Maximum leverage is low, minimum deposit requirements are extremely high, and Turkish residents are not legally allowed to trade Forex with brokers outside Turkey. There are a few Forex brokers remaining in Turkey, but effectively nobody residing outside Turkey is using them.
United Arab Emirates:
Central Bank of the United Arab Emirates
Dubai Financial Services Authority
Maximum Forex Leverage: 1:500
When people speak of Forex in the U.A.E. they usually mean Dubai, and for good reason: it has become the offshore financial hub of the Gulf. Regulation is light, taxes almost non-existent, and the industry booms for both residents and non-residents. Dubai is the premier Forex venue for the Arabic-speaking world and a little but beyond too.
Forex Brokers in Dubai
United Kingdom:
Financial Conduct Authority
Maximum Forex Leverage: 1:30
The capital of the United Kingdom, London is one of the worlds oldest and most renowned offshore financial services centers and that of course has always included Forex and CFD brokerages. In fact, London is the world’s Forex capital and that has always been reflected by the strong regulatory touch and deep technical expertise of the U.K.’s Forex industry which has always attracted more offshore than onshore clients. Forex and CFD trading are very popular in the U.K. and this is partly due to the fact that profits generated can be completely free for U.K. residents if operations are conducted as spread betting. London will always have a special place in the global Forex industry and remains a very attractive venue to traders.
Forex Brokers in the UK
United States:
Commodities and Futures Trading Commission
FINRA
New York Stock Exchange
Office of the Comptroller of the Currency
Commodities and Futures Trading Commission
Securities and Exchanges Commission
Maximum Forex Leverage: 1:50
The United States is not a favored venue for offshore Forex traders, and U.S. traders have few domestic options from traditional Forex / CFD brokers. The U.S. market has always been dominated by futures brokers and remains so today, who of course allow trading in Forex futures but with much higher minimum trade sizes. The CFTC has the primary responsibility to regulate all Forex brokers in the United States, who are banned from offering CFDs or any leveraged trading in commodities. Contrary to popular belief, U.S. resident traders may use offshore Forex brokers, but most offshore brokers do not wish to take U.S. persons as clients due to onerous reporting requirements the U.S. effectively imposes worldwide.
Forex Brokers in the U.S.A
How can financial authority help you?
When forex broker misbehave you can take action in your own hand. Financial authority is your online police station. When things go wrong you report the criminal and press charges! Most regulators allow you to file a complaint either via email or fax. The most effective means of filing a complaint is to explain the situation with as much detail as possible. If you know any other similar incidents involving other forex traders, this is the time to include this information in your complaint. Including proof is also favorable. By proof, I mean screenshots or saved email or chat conversations with the guilty forex broker. Just like in real court, when filing a complaint you have to provide evidence.
Apart from filing a complaint and finding the details about each regulated broker you can also check complaints filled by others. In my opinion, this is the best way to find out your forex broker reputation.
What is considered Scam when it comes to Online Forex Brokers?
First trick is called bucket shop. There are forex brokers that simply do not put trading orders through the interbank forex market. How does this influence you? Well, the trades stay in brokers system and therefore the broker is able to control the spreads (the difference between the bid and the ask prices) and even distort the market. This trick is used by forex brokers that depend on forex traders losing. Trading with such broker is extremely difficult – make profits and withdraw money can simply turn into nightmare.
Another trick is to “play” with stop positions. When forex trader puts a stop on the trading system, forex broker can deliberately move the price quote to hit the stop and once trader is “robbed”, the quote goes back to where it started from.
There is no simple formula to detect fishy broker. However, in my opinion, trading with registered forex broker is the least you can do to protect yourself.
Guidelines to regulated brokers
As mentioned earlier, the regulatory requirements for forex brokers vary from region to region. Nevertheless, although the specific details of the regulatory requirements may vary from region to region, there are some commonalities with all the regulations imposed by the various regulatory agencies:
- Brokers are required to maintain sufficient liquidity to meet all contractual obligations.
- Brokers are required to maintain segregated accounts.
- Brokers are required to submit regular audits to verify their compliance on their capital adequacy ratio.
- Leverage ratios are capped to a certain limit.
Bottom Line
The majority of people do not have the luxury of losing their investments. Even if you have enough to bounce back in a matter of days, or not be impacted at all, nobody deserves to have their money scammed from them. However, eliminating scammers from the forex trading scene is close to impossible. When one is shut down, hundreds of others will be opened up.
Therefore, the best solution is to know what a scam looks like and protect yourself from these painful losses. Stick to established forex brokers. Do not fall into the temptation of making quick, massive profits: there is never such a guarantee in forex trading.
Finally, any broker that is worth their salt will always invest in a decent, informative site and responsive customer service. Trading is a great business, but it takes patience, skill, and often a lot of money to take off. Do not allow your hard work to be stolen from you.
The increasing number of new traders has led to the emergence of many Forex brokers in the last few years. However, not all Forex brokers are trustworthy, especially the unlicensed ones. You do not want to buy a pig in a poke, right? Especially when it concerns a lot of money. That is why choosing a fully licensed Forex broker is a must to avoid scams and losing money.
Simply put, a licensed Forex broker can provide a safe and reliable trading environment because of various rules and regulations enforced on it by the regulating authority.
To make sure that the funds are secure, licensed Forex brokers must separate the clients’ funds from their own operational funds and put them in major top-tier banks. In this way, any problem with the operational funds will not affect the clients’ funds. They should also take other security measures and provide maximum transparency in terms of hidden fees.
Forex brokers are to be audited regularly to make sure that they meet the capital requirements. They need to implement good business ethics and fair dealing practices in their financial activities towards the clients.
Licensed Forex brokers usually offer other security measures, such as negative balance protection, compensation schemes, encryption protocols, and diversification of clients’ funds to protect and cover the clients’ funds in the event of bankruptcy.
