The difference between being "regulated", "licensed", and "something else..."
Yesterday, I was entering a new (unidentified) company in our Forex brokers database. Their website was professionally designed and the company offered commission-freetrading on more than 100 currency pairs with spreads as low as 0.5 pips on the MetaTrader4 platform.
VERY NICE!
They have seven (7) offices with very impressive addresses around the world in cities like Vienna, London, New York, Chicago, Mumbai, Moscow, and Saint Petersburg.
IMPRESSIVE!
You can open an account with them for as little as $200 USD and even get a special-purpose personal loan for up to 200% of your deposit amount.
UH-OH, RED FLAG!
Did I read that right? A special purpose loan? I know about trading on margin but I've never heard of getting a personal loan from a broker to trade Forex. Maybe they just used unusual phrasing to describe margin trading. I had to check into this a little further.
I decided to investigate their regulatory status and they listed the ICC. I googled "ICC" and found the ICCInternet Chess Club, ICC IllinoisCentral College, ICC InternationalCricket Council, and finally the ICC International Chamber of Commerce. Oh! Heavens to murgatroid! The company's only certification of their legitimacy was registration with the International Chamber of Commerce.
RED FLAG #2!
Well, that was very laudable for the company to voluntarily register with the International Chamber of Commerce. The ICC "is the voice of world business championing the globaleconomy as a force for economic growth, job creation and prosperity", but the ICC is NOT a regulatory authority and provides no trader protection.
I had to dig a little deeper so I called their New York office. No answer. I thought it might have been a little late in the day so I called their Chicago office. After six rings I got a recording with a British accent requesting that I leave a message.
I HAD ENOUGH!
There are many international Forex companies adept at giving the appearance of being a professional brokerage with all the trappings of financial success including registration with a sanctioned regulatory authority. However, while the named body may be completely authentic, it might not be a "regulatory" agency with a public or governmental mandate for financial oversight. A true regulator is responsible for overseeing the behavior, services and products of a company in the financial services sector and has the power to fine, enforce punitive actions or even stop a firm from trading by removing its license.
Being licensed is different from being registered with a regulatory authority. While a Forex broker's license might provide you some degree of comfort, you still have little or no protection compared to trading with a properly regulated firm. A license can be obtained if a firm meets the criteria for operation and agrees to follow a code of conduct. In the UK, for example, the body that grants licenses is HM Revenue& Customs, while the regulatory body is the Financial Services Authority (FSA). In the U.S. their counterparts are the National FuturesAssociation (NFA) and Commodity FuturesTrading Commission (CFTC).
A licensing body doesn't perform the same administrative functions as a regulator, nor does it have the same enforcement powers. Failure to comply with licensing rules or operating code could result in a license being revoked and stopping the firm from trading. But a licensing body has little or no power to arbitrate a dispute you might have with your broker.
A regulatory authority, however, can not only investigate and take action in a broker-trader dispute, but can even intervene when trading practices need to be changed; even if those practices are not deemed illegal, just not in the best interest of the trader. A regulator can protect a trader against poor practices which, while not in violation of any license code, may still be deemed as otherwise unfair.
With such wide diversity in regulatory oversight between regulatory authorities around the world, it is incumbent upon anyone considering trading Forex to check the agency with which their chosen broker is registered. If you are trading with a broker in a country where the company is not registered, you are NOT protected. Take a look at how GAIN Capital protects itself and its traders by employinga regulatory umbrella where they do business. This is why we are changing our company profiles to include the broker's regulatory registration data.
Make sure to check our list of International Regulatory Authorities to verify with which agency your broker should be registered.
By the way, I will still probably put that company, with its seven websites, into my database because that's what I do. I make the information available and I don't pass judgment. That's your job, but please be diligent.
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