FCA Regulation Guide

Undoubtedly, one of the most important things to take into account when entering the FOREX market is to never underestimate the importance of regulatory bodies. It is easy to see why this is true. FOREX regulatory bodies are primarily responsible for establishing FOREX operational and execution standards by, among other things, safe keeping of your investments. Acting as a “guardian” of your money, a strong regulator makes it much harder for brokers to misuse client funds, although no regulator can remove every risk. In what follows, we will review the UK’s Financial Conduct Authority (FCA), considered by many as a leader in the field and 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.

The FCA in Brief

While the FCA is the financial regulatory body for the UK, it operates independently of the British government, as a public body accountable to HM Treasury and Parliament, and is financed by fees collected from members of the financial services industry. The FCA regulates financial firms providing services to consumers and maintains the integrity and transparency of the financial markets in the UK. It makes sense then, that knowing the identity of the best FCA regulated brokers is a powerful tool for you as a trader.

Each broker domiciled in the UK should be licensed by the FCA. Details of their regulatory status should be easily accessible on FOREX companies’ websites, with each carrying a register number. In cases where a company claims the FCA licenses it, but where you have doubts, you can easily verify this information by visiting the FCA broker register here. If you find the firm, check that the website, phone number and address match the register, because scammers sometimes pose as authorised firms (“clone firms”). Otherwise, the company in question is not licensed by the FCA and should be avoided at all times.

Filing A Complaint Against A FOREX Broker

If you have a problem with an FCA-authorised broker, complain to the firm first; if it is not resolved, you can usually take it to the Financial Ombudsman Service. If you suspect a scam, you can report it to the FCA via https://www.fca.org.uk/consumers/how-complain.

FCA-authorised firms that break the rules face serious repercussions. These include canceling the company’s FCA license and/or closing it down altogether.

Minimum Capital Requirements for FCA FOREX Brokers

To become an FCA-regulated FOREX broker, a firm must first fulfill the following minimum capital requirements, which have effectively been put in place to ensure that a firm is able to meet its financial obligations.

Under the FCA’s Investment Firms Prudential Regime (MIFIDPRU 4.4 in the FCA Handbook), the permanent minimum capital depends on what the firm does:

1. Dealing on own account (for example, market-maker brokers that take the other side of client trades, the “B-Book” model): a permanent minimum of £750,000.

2. Holding client money or client assets (as many STP/“A-Book” brokers do): £150,000.

3. Only receiving and transmitting or executing orders, managing portfolios or giving advice, without holding client money: £75,000.

Both market-maker and STP brokers can offer FOREX Contracts for Difference (CFDs) if they have the right permissions. If an FCA-authorised investment firm fails, the UK’s Financial Services Compensation Scheme (FSCS) can compensate eligible investors up to £85,000 per person, per firm, according to the FSCS. This and other rules were established to shore up the financial confidence of UK consumers.

Ethical Brokerage Practices for FOREX Brokers

Licensing requirements aside, the UK’s FCA continuously inspects the code of conduct of all its regulated brokerages, with the aim of detailing efficient business practices, as will be discussed below.

1. Segregation of client funds

With regard to client deposits, these must be maintained in separate bank accounts, without granting the brokerage firm the ability to use these funds. Under the FCA’s client money (CASS) rules, these accounts must be held with approved banks.

2. Reporting and auditing

FCA-regulated FOREX brokers must provide clients with monthly account statements and position records. Moreover, they need to supply the FCA with the following information:

• Capital adequacy requirements, calculated on a daily basis.

• Audited financial statements, produced annually or quarterly.

• Monthly financial statements, to be prepared according to best-practice accounting principles.

The objective behind all these “precautionary” measures is to place a higher priority on brokerage firms maintaining ethical financial practices while minimizing the risks of fund misappropriation.

3. Creating an efficient management structure

According to the FCA, FOREX brokers must employ qualified professionals, ensuring that senior management members are capable of making informed critical decisions. Other important information FOREX firms need to disclose to the FCA include:

1. A proper business plan.

2. Anti-Money Laundering (AML)/Counter-Terrorist Financing (CTF) manuals.

3. Know Your Customer (KYC) information of directors, beneficial owners, affiliates and controllers.

4. Proof of professional indemnity insurance.

4. Risk disclosure

The FCA attaches high priority to FOREX brokers making client education a key priority. This can be done in two ways. One, customer service representatives need to be efficient and able to handle queries and have training for operating trade terminals. Two, the risks traders face from FOREX trading have to be properly conveyed to the consumer, clearly and in all marketing materials. In the EU, the MiFID II rules, which apply since January 2018, likewise make it a prerequisite for all brokers to have compulsory risk disclosure clauses and uniform information on all marketing and branding materials.

5. Customer-centric services

Within its strict guidelines, FCA-regulated FOREX brokers cannot resort to manipulative trade practices; brokers that take the other side of client trades must manage that conflict of interest fairly. At the same time, FCA-regulated FOREX brokers are banned from making improbable assurances. Likewise, they cannot advise clients to take adverse and risky trade decisions. Not adhering to these guidelines represents a violation of the rules and can lead to heavy penalties. While certain telephonic and electronic communications between clients and employees can be recorded for training purposes, this can only be done after clients have been properly notified. In sum, FCA-regulated FOREX brokers cannot only focus on how to just make profits. Rather, they should also provide customer-centric services, catering to their traders’ security and other needs.

6. FOREX leverage

To halt firms from offering disproportionally high leverage to consumers, which can result in a high number of customers losing money, the UK’s FCA has imposed leverage limits on financial instruments. This means the days FOREX brokers were able to offer crazy leverage limits of 1:1000 on FOREX trading instruments are all but over.

FCA Confirms Permanent Restrictions on Sale of CFDs and CFD-like Options

The effective regulatory changes discussed in this section demonstrate how strongly the FCA can guide the activities of FOREX brokers. In July 2019, the FCA confirmed that it would make the temporary restrictions on selling CFDs and CFD-like options to retail investors permanent. Brokers must cap the leverage on CFD trading between 1:30 and 1:2. If a trader’s position fell below 50% of the margin required to maintain their open positions in their CFD account, the broker must close positions.

More recently, the FCA has issued a rule that forbids the offering of monetary benefits to clients in return for trading. In addition, standardized risk warnings vis-à-vis the percentage of retail customers who lose money from trading CFDs have to be provided to all clients. Firms that sell CFDs to UK retail clients must abide by these rules.

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Conclusion

The FCA, as the UK’s financial sector watchdog, has one of the most comprehensive regulatory structures for financial service providers. At the heart of its objectives is the need to ensure that people do not invest in products that are unsuitable for them. In cases where a FOREX brokerage firm does not follow the aforementioned guidelines, it can endure significant penalties or even be banned from operation for life. This gives FCA-regulated FOREX brokers strong reasons to deal transparently and professionally with consumers, but you should still check a broker’s status on the FCA register and understand the risks before you trade.