What Does It Mean to be an FCA Regulated Forex Broker?
The Financial Conduct Authority (FCA) is an independent regulatory organisation, responsible for overseeing the conduct of both retail and wholesale financial service providers in the UK. It has significant powers to regulate the marketing and sale of financial products, investigate individuals and firms, ensure minimum standards in the creation of financial products and protect investor interests. The overall aim is to maintain financial stability of the country and promote effective competition in the market for the benefit of investors.
For forex brokers, the FCA is one of the most coveted licenses in the industry. The name carries a certain reputation and credibility for all financial service providers. This is because the FCA is known for its stringent laws and regulations that ensure transparency, security and fairness in all dealings.
To be an FCA-regulated forex broker, a firm has to first fulfil the minimum capital requirements.
Minimum Capital Requirements for FCA Forex Brokers
There are mainly 3 categories in which firms can get FCA forex licenses:
- Dealer License: The minimum capital requirement to get a dealer license or what can be termed as a “market maker” license is €730,000. This license also lets brokers run a B-Book, as the client’s counterparty.
- Intermediary License: This is a “matched principle” license, particularly for STP (Straight Through Processing) brokers, as well as for the A-Book broker model. The minimum capital requirement in this case is €125,000.
- Restricted Broker License: This type of license doesn’t allow brokers to hold client funds, but only to market and sell financial products. Here, the minimum requirement is €50,000.
Both dealer and intermediary licenses allow firms to let clients invest in forex CFDs (Contracts for Difference). The minimum capital requirements have been put in place to ensure that a firm is able to meet its financial obligations. From April 1, 2019, the Financial Services Compensation Scheme (FSCS) increased the compensation limit for financial firms declaring bankruptcy from the earlier £50,000 to £85,000, in order to ensure that firms can reimburse their clients without fail. The rules are in place to bolster the financial confidence of consumers in the UK.
Ethical Brokerage Practices for Forex Brokers
Apart from licensing requirements, the FCA monitors the code of conduct of all its regulated brokerages. Some of the policies detail efficient business practices including:
1. Segregation of Client Funds
All client deposits have to be maintained in separate bank accounts, which cannot be used in any circumstances by the brokerage for its operational expenses. These accounts have to be maintained in reputed banks and registered with the body.
2. Reporting and Auditing
Forex brokers have to provide clients with monthly account statements and position records. Also, they need to provide the FCA
- Capital adequacy requirements, calculated on a daily basis
- Audited financial statements, annually or quarterly
- Monthly financial statements, prepared according to general accounting principles
This ensures that all brokerage firms maintain ethical financial practices and there are no risks of fund misappropriation.
3. Creating an Efficient Management Structure
The FCA mandates that all firms hire qualified professionals, with top management capable of making critical decisions. Firms also need to disclose vital information to the FCA, such as:
- Proper business plan
- AML/CTF manuals
- KYC information of directors, beneficial owners, affiliates and controllers
- Proof of professional indemnity insurance
4. Risk Disclosure
All broker firms have to make client education a priority. This includes efficient customer services to handle queries and training for operating trade terminals. Risks associated with forex products have to be properly conveyed to the consumer, in all marketing messages. The MiFID II guidelines, released by the European Securities and Markets Authority (ESMA) in 2018, now makes it essential for all brokers to have compulsory risk disclosure clauses and uniform information on all marketing and branding materials.
5. Customer-Centric Services
Any FCA-regulated forex broker cannot resort to manipulative trade practices, such as entering into positions against their clients. Brokers cannot make unrealistic promises or advise clients to take adverse and risky trade decisions. Doing so can lead to severe penalties. Certain telephonic and electronic communications with clients and employees can be recorded for training purposes, but only after proper notifications to clients regarding such practices. Overall, FCA-regulated brokers have to provide customer-centric services, catering to their security and other needs, rather than focusing on just profits.
6. Forex Leverage
To stop firms from offering increasingly higher leverage to consumers, which can result in a high proportion of customers losing money, the FCA has imposed leverage limits on financial instruments. Forex brokers can no longer offer crazy leverage limits of 1:1000 on forex trading instruments.
FCA Confirms Permanent Restrictions on Sale of CFDs and CFD-like Options
On the 1st July, 2019, the FCA issued a statement that it intends to impose temporary restrictions on the sale of CFDs and CFD-like options permanently, for retail investors.
Brokers will be required to limit leverage on CFD trading between 30:1 and 2:1. If a customer’s position falls below 50% of the margin required to maintain their open positions in their CFD account, the broker will be required to close the position immediately. These new rules regarding CFDs are expected to come into force in August 2019.
The FCA has also issued a rule that forbids the offering of monetary benefits to clients for trading. Apart from that, standardised risk warnings have to be provided to all clients, regarding the percentage of retail customers that lose money trading CFDs. Firms in the European Economic Area (EEA), with access to UK market clients, will have to follow these rules.
The regulatory body has one of the most comprehensive regulatory structures for financial service providers. It ensures that people do not invest in products that are not suitable for them. In case a brokerage does not follow the guidelines, it can endure significant penalties or even be banned for life.
An FCA-regulated forex broker will always ensure complete transparency and professionalism in its transactions with consumers.