Regulation is one of the topics that come up repeatedly in any discussion regarding a forex brokerage, particularly post-Brexit. To attract traders, a brokerage needs to have some license in place. Today’s traders are much more knowledgeable than they used to be and know what they need to look for in a new broker.
A broker without a license will probably struggle to attract clients. That’s not a reflection of the intentions of the operators. Some of the biggest collapses have been highly regulated brokers. The simple fact of the matter, however, is that any brokerage without a license will probably struggle to attract clients.
In addition to the difficulty in attracting clients, unlicensed brokers usually face restrictions in their choice of payment processors (PSPs), for example. Payment processors who do accept unlicensed brokers will probably have some kind of restrictions on the geographical locations they will process payments to and from and typically will charge unlicensed brokers a much higher processing fee.
Licensing does come with increased startup costs and compliance requirements, but the benefits far outweigh these. Licensing makes sense, and choosing the appropriate jurisdiction for your brokerage is crucial. If you don’t plan to onboard clients from the countries of the European Union, then this would rule out all these jurisdictions. If your marketing plans offer high leverage investment services, that will exclude certain jurisdictions that place upper limits on leverage.
One of the critical questions to answer is, “where do my clients come from?”
Forex and CFD trading has seen a massive jump in popularity over the last decade. Trading is an online process, and the increase in internet coverage and speeds were two driving forces behind the spike in popularity.
Introducing new tradable assets such as cryptocurrencies also played a significant part in the industry’s growth, with daily trade volumes in the forex market of over Six Trillion United States Dollars!
MiFID (Market In Financial Instruments Directive), in force since 2007, featured a passporting scheme for financial instruments regulation. Under MiFID, a broker regulated in a member country of the European Union could offer forex trading services to residents of other countries in the EU.
MiFID meant that a broker regulated in Cyprus, for example, could provide services to citizens of Germany or any other EU member state.
MiFID evolved into MiFID II in January 2018, with the EU introducing further legislation, the European Securities and Markets Authority (ESMA), designed as a single regulatory framework for all EU countries. ESMA introduced limits on leverage for the various financial products on offer from brokers for retail investors and the notion of Professional Traders. They could apply for higher leverage limits in their fx trading if they met the regulations’ criteria.
Let’s look at some of the most popular jurisdictions for new broker registrations.
Cyprus – CySEC
CySEC, the Cyprus Securities and Exchange Commission, is the forex regulator responsible for issuing licenses to new CIFs (Cyprus Investment Firms), regulating forex brokers, and is a member of MiFID II. Therefore, Cyprus is a very attractive option for brokers planning to offer services in the financial markets to EU countries.
The application and licensing process can be complicated and take up to three months or more.
CySEC regulations require a local office and several authorized personnel, including Backoffice and Compliance officers.
The financial services industry in Cyprus is extensive. The island is home to many Fintech companies ranging from forex CRM providers to trading platforms, payment processors, technical analysis companies, and many others.
Setup and licensing costs are high, as are the registered capital. CIFs regulated by CySEC have access to an Investor Compensation Fund (ICF) and, of course, to the EU market. As a member of ESMA, the maximum offered leverage for CIFs is 1:30 for most tradable assets. Cyprus is a good option if your plan calls for access to EU clients.
The United Kingdom – FCA
FCA, the Financial Conduct Authority, is generally regarded as one of the top regulators in the world. London is a key financial center, and brokers regulated by the FCA tend to be significant global brokers with regulation in other jurisdictions as well.
Since Brexit, brokers regulated by the FCA no longer have access to the EU. By the same token, EU-regulated brokers no longer have access to the UK market.
The FCA regulatory framework is exceptionally stringent, and the compliance process is comprehensive. As a result, UBOs and directors come under intense scrutiny. In addition, FCA licensing calls for a physical presence, as well as authorised members of staff holding key positions such as Compliance and AML (Anti Money Laundering) officers.
FCA is the only licensing option for brokers planning to onboard clients from the UK.
Malta – MFSA
Malta is a popular jurisdiction for forex brokers. While the market is not as developed as Cyprus, it is an established option, although the process can be lengthy, with average timeframes of close to six months.
The forex regulator, The Malta Financial Services Authority is home to an ever-growing number of brokers. Since Brexit, many brokers relocated to Malta for continued access to the EU markets.
Licensing costs and registered capital are lower than those for CySEC, and as Malta is a member of the EU, licensing there opens the European Union markets to brokers.
Seychelles – Financial Services Authority
Startup brokerages may not be in a position to support the high fees and registered capital required in other tier-1 jurisdictions. For these brokers, the Seychelles Financial Services Authority is an attractive option. License costs are only $1,000, and capital requirements are a low $50,000.
A more relaxed compliance regime ticks all the boxes for new brokers looking for a less stringent regulatory framework and reduced administrative responsibilities.
Since the Seychelles forex regulator is not part of ESMA, licensed brokers are in a position to offer increased leverage across the board, an option many retail traders actively seek out.
Plugit Apps has been helping new and existing brokers with their operations since 2012. Our flagship product, the Yoonit suite of modules, is at the core of over one hundred global brokers.
In addition, our Admin and Client Portal module will help you streamline your client onboarding, regardless of the forex regulator you choose for your business.