Forex trading is one of the most lucrative businesses a person can engage in if they have the technical know-how, and there are thousands of brokerages taking a piece of the pie. Despite the massive amounts of money that pass through the Forex market, and despite regulatory bodies monitoring the entire industry, unlicensed brokerage firms and brokers still exist. Online, articles from industry experts point to this disturbing trend.
A big reason these unlicensed brokers are proliferating is that there is no real penalty for being unregulated while being a licensed broker usually means tons of restrictions and bureaucracy. At face value, this does make operating without a brokerage license an attractive prospect. However, the long-term risks can be quite heavy.
One of the things that incentivize unlicensed brokerage activity is the fact that many countries around the world require potential FX brokers and brokerage firms to pay extensive fees to become regulated and then strictly follow multiple and complex rules and regulations. These rules, of course, are put in place to protect traders. However, they make “legal” brokerage difficult and expensive.
Unlicensed FX brokers, on the other hand, are unburdened by rules and regulations. While this makes it easier for them to operate, it puts consumers at risk, because if a deal fails there is little to no legal recourse available. There are also easier transaction options available to non-licensed brokers, some of which are illegal in the United States for a number of reasons.
Unlicensed brokers also enjoy operating without the need to consider the various fees and expenses licensing requires constant submission of documents, legal advisory, certification and licensing exams among other things.
Depending on the country of jurisdiction, unlicensed brokerage firms can operate without oversight or regulation, like in St. Vincent. Some countries offer firms cheaper and faster incorporation, giving them a legal operation with a less stringent regulatory body watching over their every move. First-time traders, unaware of the differences between jurisdictions, can be tricked into thinking that they’re dealing with a legitimate and ethical firm when in many cases they aren’t.
Countries with loose financial regulations are attractive to unlicensed brokers because the situation allows them to operate with little-to-no-risk on their part. It also gives them the freedom to create their own terms and conditions for traders, that benefit the broker and the firm.
So Why Be Licensed at All?
Unlicensed brokerage firms are starting to flourish, and it’s easy to see why: complex regulations, heavy fines for even the smallest mistakes, a large investment of time and resources to get recognized by official regulatory bodies – these are all factors that could potentially turn a broker off from getting a brokerage license.
However, Forex, and the stock market in general are unique industries in which trust is a major component in every transaction. When a person invests huge amounts of their personal fortune on a particular stock, or in exchanging foreign currencies, they need a broker or firm they can trust. After all, some of these transactions can be worth millions of dollars and a trader’s life savings.
Unlicensed brokers do not necessarily enjoy the trust and confidence of traders. While there are perks attached to being unlicensed, the long-term risks severely outweigh the short-term gains.
Apart from a lack of big business due to ill reputation, governments around the world are now taking steps to curtail unlicensed brokerage activity. Banks and online payment firms are making it even harder for unlicensed brokers to transfer funds and process payments, in an effort to curb their rise.
The initial investment may be heavy, but taking the time, effort, and capital to obtain a license is an investment worth taking. Not only does this gain the trust and confidence of traders, it also secures banking and financing options.