Is Trading With a Regulated Broker Even Important?

Is Trading With a Regulated Broker Even Important?

There’s a lot to be said for regulation, both for and against using a “regulated” forex broker.

In this article, we explain some of those arguments to help you better decide who to give your investment to and do your trading with.

Firstly, is your chosen broker really regulated? The advertising states “regulated broker”, the website suggests this too. Maybe you even checked out the regulator’s website to see if the broker was actually there.

Does it matter? Are you trading with a regulated broker, even with the above in mind? Or, when you went to compare broker info, were you simply pulled in by the fancy logo and words?

Well, ultimately it all comes down to something sounding remarkably boring: legal entities.

Under the fancy brand umbrellas, each broker is often comprised of more than one limited company; a legal entity.

The legal entity or limited company is the regulated part – not the brand that you’ve fallen in love with (well, maybe the conditions or offer anyway).

Each legal entity will serve a certain jurisdiction(s). That’s just a fancy way of saying different parts of the world – different countries. As different countries have different rules for investing in forex and CFDs and/or the regulator might have tight restrictions on which countries the company might be able to take clients from.

Therefore its important to understand which legal entity – which company under the umbrella of the brand name – you are actually onboarding with. To be fair to the regulators, they have forced forex brokers to be much more transparent about this in recent years, however it still might slip your notice, no matter how big the “you are being switched to..” button might be.

For example, an Australian broker with ASIC regulation by default can only onboard clients from Australia right now. They must pay for expensive legal opinions (which are then approved by the regulator) in order to take clients from other countries outside Australia.

The European brokers, falling under ESMA – with regulators such as the CySEC – only have the EEA countries by default. Again, they must apply individually for other third countries for you to be part of the regulated broker if you live outside Europe.

Let’s not get started on the FCA in the UK – only time will tell how that pans out. Most likely, FCA brokers will only be able to “on board” UK residents, needing special permission for all others following Brexit starting in November 2019.

When the rules are onboarding you under a particular entity is not possible, you may be redirected or offered an alternative route – usually to an offshore legal entity which may or may not actually be regulated. Here is where it can get grey and misty – if you care?

Examples of “offshore” being the Seychelles, Bahamas, Belize, Bermuda, Vanuatu and St Vincents and the Grenadines (there are more). So called “Exotic” regulation, and in the case of St Vincents, no actual regulation at all.

The Exotic regulation gives the broker an opportunity to offer widely different trading conditions and actually serve you from this different company.

So, where do you live?
During the registration process, the broker’s registration form will ask for your country of residence – this defines to which legal entity you become a customer. There’s no point telling lies at this point either, as in order to be approved, you’ll need a proof of residence, like a gas or electric bill or some other official proof in addition to a proof of identity. This is true even when the broker is not regulated at all.

To be clear – if you are dealing with a broker who is not asking for any such proof; Run. Fast (away).

This is why the brokers have all the different regulations and companies under their brand. Your country of residence will be applicable to only one usually, maybe two – the choice is yours.

Exotic regulation
The regulator, of an offshore “exotic” license location, checks his emails.

Why a Choice? The “so what” question.
Well, certain regulators are more lenient with the products and services a broker may offer. The top tier regulators – such as those in Europe and Australia generally follow the same pattern – they limit leverage and impose other rules on margin and marketing, promotions etc. The more lenient the regulator is, generally the smaller the island on which they’re situated…

So, if you are in a position to choose, what are the differences?
Well, as mentioned, leverage is usually the key here. With higher leverage comes the opportunity to make much bigger returns of course. Same is true in reverse of course (a nod of the head to the regulators here), that higher leverage equally increases the potential losses. Aside from that, regulated firms usually have a type of investor protection – covering your investment up to $xxx amount in the case the brokerage becomes bankrupt. Example with a CySEC broker, you’ll recover $20K in this scenario. Are you bothered about that benefit?

Maybe this third benefit will swing your vote; negative balance protection. Since the new MiFID II rules came out, all ESMA (European) brokers must provide this function out of the box, so you can never lose more than your initial investment. You can make a million from $1000 bucks, and lose the million … but you’ll never lose more than the initial $1000. Good to know. Also, Australian ASIC brokers offer something similar without it being compulsory.

Finally, of course, where a broker is regulated, this means they are accountable to a Government body. This means you can file a complaint about them if something shady happens. A non-regulated broker, even if part of a group with regulated entities does not entitle you to file a complaint. You can’t – they’re not regulated.

To summarize:

Regulation is good. It has helped clean up the industry, and make it safer for investors.
However, with too many rules and regulations, brokers get forced into “gaming” the system to continue to support their clients with what they actually want (usually high leverage) and make the same profit margins…

This results in a myriad of legal entities and multiple licenses, which can be a bit confusing.
You are however usually only allowed to join one or two of these companies during registration – the choice is yours: regulated or offshore..
Which broker will you choose!?