FCA Forex Brokers

When choosing a fx broker of any kind, one of the first things we are taught is to be sure to check to see if the prospective firm is regulated. If there is competent oversight from a robust regulatory authority, then the chances of fraud or bad business practices is diminished, but never eliminated (read more about bad broker practices here). It is always a good thing, however, to be aware of the regulatory authorities in each region of the world where forex trading is prevalent and to understand their duties and how they might protect your interests.

In the United States, the Commodity Futures Trading Commission (CFTC) and its “cousin”, the National Futures Association (NFA), provide the regulatory oversight for the various forms that currency trading takes in that market. Many other regulatory agencies follow the best practices established by all U.S. regulators and cooperate fully on issues where cross-border issues come into play.

In the United Kingdom, the resident regulator is the Financial Services Authority (FSA). Since the UK is a member of the European Economic Area (EEA), it operates under the auspices of the Markets in Financial Instruments Directive (MiFID) legislation that covers all of Europe and the EEA member states. When dealing with a broker from the UK or Europe, you may often see registrations bearing each of these abbreviations — FCA, EEA, and MiFID.

What is the FCA and these other European entities or directives?

According to their website, the FCA is “an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. We are a company limited by guarantee and financed by the financial services industry. We are accountable to Treasury Ministers and, through them, Parliament. We are operationally independent of government and are funded entirely by the firms we regulate. We are an open and transparent organisation and provide full information for firms, consumers and others about our objectives, plans, policies and rules, through this website. We are the independent body that regulates the financial services industry in the UK.”

In April 2013, the FSA Regulation was replaced by The Financial Conduct Authority (the FCA).

Each EEA member state will have their own regulatory body, but all follow the guidelines of the MiFID. The MiFID is a European Union law that “provides harmonised regulation for investment services across the 30 member states of the European Economic Area (the 27 Member States of the European Union plus Iceland, Norway and Liechtenstein). The main objectives of the Directive are to increase competition and consumer protection in investment services.” It is common to see brokers in the EEA region display their registration credentials and regulatory affiliations to assure prospective clients that they are trustworthy and operate in a safe and sound manner.

What are the objectives of the FCA?

The FCA has a wide range of enforcement powers, rule-making authority, and rights of investigation to carry forward its stated regulatory mission and achieve its stated objectives. These objectives are:

• Market Confidence – Maintaining confidence in the UK financial system;
• Financial Stability – Contributing to the protection and enhancement of stability of the UK financial system
• Consumer Protection – Securing the appropriate degree of protection for consumers; and
• The Reduction of Financial Crime – Reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.

By achieving these goals, the FCA hopes to establish accountability and transparency in the forex industry and assure consumers that their registered brokers can be trusted.

Why is regulatory oversight so important?

In some regions of the world, forex brokers are left to operate as they see fit. Some may state that they abide by global principles of good business practices, but without an independent body demanding that certain standards be met, and then having the power to audit on the spot if there is complete compliance, some brokers may deliberately take advantage of the lack of supervision.

These standards may deal with how much capital the broker has on hand to fund your trades and keep his operating liabilities in check. Typically, registrations are also required that disclose the owners and management of the firm, their backgrounds, and how they have demonstrated in past job assignments their ability to earn the public trust. There may also be standards of education for their staff and what they can say and market about their services, while also educating the public as to the high-risk profile of forex trading.

A healthy regulatory environment is also a plus to ensure that the banking industry in the country, the place where your account balances may be held, is also operating in a safe and sound manner. Cyprus recently went through a crisis when its two largest banks failed due to heavy investments in Greek bonds that were devalued. Bailout terms demanded that operating accounts of many forex brokers on the island be seized, as a consequence of actions that had nothing to do with currency trading.

Traders should still perform due diligence on any prospective broker that they might choose to do business with, even in a heavily regulated country. Regulators, like other government agencies or independently funded bodies, are limited by budget funding constraints. They cannot be everywhere and audit everything for compliance. There will still be problems beyond their span of control. Once again, Cyprus is a good example. The regulator there, CySEC, is well respected, but investment decisions at each bank did not follow prudent management guidelines. Problems still occurred, even with oversight, but imagine how much worse it could have been without it.

What are some examples of FCA brokers?

London is the undisputed financial center of the world of foreign exchange. Old established firms like FxPro is FSA approved brokers, as well as many small and medium-sized firms. See our top list above and visit the FCA website for more information.

Concluding Remarks

Not all forex brokers in the world operate in a regulated jurisdiction, but, as a rule, you will find the best regulatory infrastructures located in the developed economies of the world where the banking systems are also heavily regulated. Regulation is a good thing. Always look for brokers that are proud of their compliance record and activities. Be wary of other brokerage firms, but the lack of a good regulator does not necessarily mean that an unregulated forex broker might not perform well. Let caution be your guide.