If you are a trader, then you might have noticed how several forex brokers like to flaunt their licenses that they hold as if they are some kind of prestigious award that they have earned. They put a lot of effort into their marketing to share with the potential traders where they have got their regulatory status and the licenses they have acquired. However, they often fail to let people explain why forex regulation is significant. They present their licenses as some sort of trophy on their website, but they fail to explain the real meaning of forex regulation.
In most countries, financial services require some kind of authorization, especially for those who serve retail clients. Various brokers, banks, insurers, financial advisors and money transfer companies are subject to the supervision of numerous authorities. Most countries have a National Competent Authority that regulates the capital markets. Sometimes there are different agencies responsible for regulating and controlling different sectors. For Example, banking can be regulated by a country’s central bank. Similarly, insurance companies can be regulated by insurance watchdogs and investment companies.
Forex is one of the regulated activities in Europe, Australia, Japan, New Zealand, South Africa, the United States, the UK and a few more. In all the above-mentioned countries, strict protocols must be complied with. If these are not followed, strict penalties can be imposed.
Forex Regulation Vs Registration
Based on your country and sector, getting authorization to provide financial services is easy. For Example, in New Zealand, a broker only needs to enlist on FSPR to offer financial services outside the country. Similarly, there are rules for St. Vincent & the Grenadines. All you need to do is to fill out a form and provide reports periodically.
There are certain initial requirements that must be fulfilled before registration can be availed of. For Example, the registry might need to check the criminal background of the broker before registering them. However, traders need to be careful as there had been incidents in the past where brokers misrepresented what it meant to be listed.
On the other hand, regulated companies must pass steep requirements before a license is issued. Furthermore, brokers need to follow strict rules, prepare detailed reports, and submit them to the regulators and tax authorities. Additionally, regulated brokers must keep the regulators aware of any issues they might encounter and how they plan to resolve them.
How Can A Broker Get The Forex License?
Let’s now explore what a broker needs to do to get the license to provide forex and CFD trading services. Additionally, brokers’ difficulty does not end with acquiring a license; they need to make constant efforts to maintain it.
- Fit & Proper Test
Regulatory authorities are always keen to know the owners and managers of financial services companies. Regulators scrutinize all the directors and senior managers on the basis of their qualifications, work experiences, references, financial strength and personality. If you have a criminal record, it is most likely a big red flag and can impact your application negatively.
- Capital Requirements
Regulators also want to know that anyone wanting to start as a forex broker has adequate capital to run the business. In Europe, a broker must maintain a minimum balance of €730,000. Additionally, the company must have sufficient funding to cover the operational and marketing costs until the company reaches the profitability stage.
The license application process is costly. Therefore, regulators expect the firms to be ready to operate and have offices, employees and adequate technology there when they receive their licenses. The minimum capital requirement acts as a safety net to keep the company on the right track if it faces any unexpected hardships.
- Reporting Obligations:
Any regulated forex broker has to adhere to strict reporting obligations. They must maintain detailed records of their trades and share all the stored details with their clients. All the regulated forex brokers are required to follow such rules depending on the authority that regulates them.
There are a wide number of obligations that brokers must follow to obtain and maintain their license to run a forex business. However, legislation can change from time to time, and you might break one or two intentionally or unintentionally. Therefore, it is suggested that brokers be extra careful and hire professional consultants whenever needed.