How Your Regulator Impacts Your Funds Safety

How Your Regulator Impacts Your Funds Safety

Regulators of financial services come in all shapes and sizes. Each and every regulator has their own rules and regulations governing firms who are affiliated to them.

Knowing your regulator is critical whether you deal in Forex, CFDs, spread betting, commodities, currencies, indices, cryptos, shares or any other form of online trading. In fact, knowledge of your regulator can be as important as knowledge of the broker themselves.

Over 80% of global regulators offer zero funds protection and poor consumer protections. These include The Seychelles, Bermuda and St Vincent & The Grenadines. It’s vitally important for you to choose a broker who offers at least some form of funds protection in case the unthinkable happens and that your broker goes into receivership. This actually happens with alarming frequency in the often murky world of online trading.

Many brokers offer multiple regulations but will often ‘push’ the less safe ones onto you. They will claim that it’s better because you will get more leverage or other ‘benefits’. However, what they might not tell you is that you will be giving away all the consumer protections and funds safety that more reputable regulators will give you.

Here we will look at the significance of the regulator for you and your daily trading. We will look at 3 popular regulators who offer compensation schemes – FCA, FINMA and CySec.

The FCA was established in 2013 in the United Kingdom (UK) and is the regulator to over 50,000 financial services  who operate in the UK. Their aim is to ensure that brokers offer honest, just and secure services for their customers.

The FCA is highly consumer led and aims to promote competition between service providers in the interests of consumers. They see more diversity as being good for consumers. They also aim to provide honest and fair markets to consumers.

The FCA have incredibly strict regulations for firms who are regulated by them. Because they are consumer driven they offer the services of a financial ombudsman who ensures that any financial disputes are dealt with fairly and impartially.

The FCA also have wide powers to enforce rules and directives are stringently followed as well as wide investigation and enforcement powers.

What is the impact of FCA regulation for online trading?

1. Leverage

As of January 2021, some aspects of FCA regulation is still following the the European Union recommendations. It’s unclear post-Brexit what exacly will happen with regards to the leverage.

The UK hasn’t changed its adherance to Markets in Financial Instruments Directive (MiFID II) which came into effect in January 2018.

One of the major impacts of the MiFID II is that leverage was greatly lowered. This means that you will need more deposit to cover the value of your trades

This is not ideal for many traders but the tradeoff is that you have higher funds protection offered by the FCA. In the long run this is better for the trader as jurisdictions with higher leverage tend to have much less protection of your funds if your broker goes insolvent.

The leverage limit is between 30:1 and 2:1.

2. Funds protection

Brokers regulated in the UK fall under the purview of The Financial Services Compensation Scheme (FSCS).

The FSCS is compulsory to join if brokers want to be FCA regulated in the UK. A huge benefit is is that the FSCS has funds protection for investors in brokers who are regulated by the FCA.

This compensation scheme will pay investors 100% of deposits up to £85,000 if a broker is unable or is unlikely to be able to pay back their customers. A famous example of this covered in this article is when Worldspreads went into liquidation.

This FSCS is basically free insurance for the customer of the online broker which is invaluable in this day and age with the prevalence of scams and clone firms.

The FSCS is free to consumers and has paid out more than £26 billion for 4.5 million customers since its inception in 2001.

As is often the case in the online financial world a number of financial institutions claim to be FCA authorised but they are not regulated in any jurisdiction.

The FCA has a list of FCA clone firms and shows you what you need to do to help protect yourself. You can also use our Safe broker tool to ensure that you will be trading with a genuine FCA regulated firm.

Another well trusted regulator if FINMA of Switzerland. Like The FCA, FINMA also insures broker deposits.

What is FINMA?

Swiss Financial Market Supervisory Authority (FINMA) is the government body of Switzerland responsible for financial regulation of firms.

Because it is a Government body it has the ultimate authority over firms regulated under its jurisdiction. It is incredibly strict in its regulation and ensures that its firms operate under a tightly monitored set of rules.

FINMA issues operating licences under the condition that the firm will be monitored for compliance with laws, ordinances and regulations under their licence terms.

For any infractions, FINMA can issue warnings, cancel licenses and even liquidate companies who are violating any rules. FINMA regulated brokers are therefore extremely stable and safe.

What is the impact of Finma regulation for online trading?

1. Leverage

FINMA offers standard leverage of 1:100 for FX trading.

Compared to ESMA’s and FCA rules which limits leverage to 1:30 for CFDs this is quite a substantial difference.

2. Funds protection

All traders with deposits at FINMA regulated brokers are automatically protected by esisuisse. It doesn’t matter if the trader is based in Switzerland or another country.

All brokers operating out of Switzerland must be regulated by FINMA and are therefore covered by esisuisse. Esisuisse offers brokers funds protection up to 100.000 CHF in case of firm failure.

When FINMA reaches the conclusion that a bank is no longer capable of continuing with  its business, it implements a ’protection measure’. At this point Esisuisse immediately calls in the required funds from its banks, brokers and securities firms.

As usual, there are some unscrupulous firms who claim to be based in Switzerland but are based in other countries. Because they don’t have the requisite authorisation then those firms would not be covered by FINMA. You can check the FINMA register or use our search for a safe broker tool to ensure that you will be trading with a genuine FINMA regulated firm.

A number of financial institutions operating in or out of Switzerland are not in possession of the requisite authorisation from the Financial Market Supervisory Authority FINMA. They may therefore not accept any deposits in Switzerland and are not members of esisuisse.

What is Cysec?

The Cyprus Securities and Exchange Commission  (CySEC) is the financial regulatory bureau of Cyprus. A significant number of forex and currency trading brokers are regulated by CySEC.

CySec can  impose administrative sanctions to brokers and penalise them for rule breaking. Recently, CySec has also been granted extended powers over the firms it regulates and can now even enter premises. This is mainly due to CySec traditionally having more slack regulation than its FCA and FINMA counterparts.

CySec has had a historical problem with its image and being seen as being too lenient with their monitoring of Forex and other high risk investment firms. It has been noted that fines given by CySec have me significantly smaller than fines administered by FCA and FINMA regulated organisations.

What is the impact of CySec regulation for online trading?

1. Leverage

As Cyprus is European Union based, they fall under the MiFID II which is the legislative structure instituted by the European Union (EU) to manage financial markets in the European Union trading bloc.

Because of the MiFID II regulations, CySec regulated brokers are covered by the maximum leverage of 1:30.

2. Funds protection

With regards to funds protection, Cyprus has their own investment compensation fund which is known as the Investor Compensation Fund (ICF).

In the event of broker collapse, the ICF will compensate customers of CySec regulated firms 90% of their deposit up to EUR(€20,000). However, this amount can be much lower  (€3.417) depending on certain circumstances. CySec describes the circumstance as:

“If no investor compensation scheme is in operation in the third country, the maximum amount of payable compensation per client of the branch is equal to an amount corresponding to three thousand four hundred and seventeen EUR (€3.417).”

You would need to check with your account manager to find out how your firm is structured. However, in our experience, the account managers generally know less than we do as their main aim is to encourage you to trade more, not be up to date with company formation and regulatory boundaries.

Regardless of whether you are covered for €3,417 or €20,000 the truth is that you will always have a shortfall in the funds that you will receive. If you have €20,000 invested at a broker that fails, the absolute maximum that you will receive is €18,000 a shortfall of €2,000.

However, it could be much worse if your firm is structured in a way where the maximum you can get is €3,417.

Of course it could be much worse, if you had over €20,000 invested, every Euro over this amount would be lost.

2. Cryptocurrency trading

If you are trading Cryptocurrencies prices at a CySec regulated firm then unfortunately your deposit is also not covered by the CIF. This is because cryptos are not considered a financial instrument by The European Securities and Markets Authority (ESMA).

If you wanted to trade cryptos and have your funds protected you may be better off using a FINMA regulated broker. Before January 6 2021 it was possible to trade cryptos at FCA regulated brokers but now the FCA has banned trading on cryptocurrencies.

It’s clear that the regulation of your broker is paramount to your funds safety in case of your broker goes into administration.

If you choose an offshore broker then your funds protection will be zero. You can ask your account manager to switch to a better regulator [if available] so that your funds would be better covered.

Remember that:

  • With FCA regulated firms your funds protection is 100% (up to £85,000)
  • With FINMA regulated firms your funds protection is 100% (Up to 100,000 CHF)
  • WIth CySec regulated firms your funds protection is 90% (Up to €20,000 or €3,417)

The most effective ways to ensure that your funds are covered in case of broker liquidation is to invest your funds in an FCA or FINMA regulated broker.  Each have extremely good funds protection.

However, also remember that brokers are often regulated in multiple jurisdictions meaning that you would need to check with your account manager to be sure that your funds are invested safely.

Always be sure to do your own careful examination of your broker (both current and potential) to ensure that your funds are deposited in a jurisdiction with strong protection of your funds.


Which regulation will you choose to protect your funds and why?