Gone are the days when a prospective FX, CFD, or Crypto broker could consider opening their business without a proper license from a regulated financial body. It doesn’t seem that long ago when many brokers were starting up with simply a registered company from exotic locations like Saint Vincent and the Grenadines or Saint Kitts and Nevis, among others. These countries, through their respective local financial service authorities, issued “exemptions” or “legal opinions” allowing brokers to carry out business from a local agent’s office address.
The Changing Landscape
Technically, this arrangement was all quite legitimate but over the last few months, the landscapes have been changing. These small jurisdictions are “rethinking” their positions but, more importantly, the banks, electronic money institutions (EMIs), and payment service providers (PSPs) are almost all requiring a proper license from prospective broker clients. Let’s face it, without a secure place to hold your operating capital and segregated accounts for client deposits, there is no functioning business.
So? Where do prospective FX/CFD brokers go for their coveted permission to carry out business? If you are new to the business, you might consider the USA to be the holy grail of opportunity with one-third of a billion reasonably solvent inhabitants. However, the regulatory requirements to open and run a brokerage in the US are prohibitive to most companies, not to mention the capital requirements that can run into the 10’s of millions of dollars. Japan is not far off and either country will impose massive requirements on reporting as well.
The Prestigious FCA Brokers License
Outside of the US and Japan, there exists a huge array of jurisdictions available to the aspiring Forex broker. Arguably the top choice would be a license issued by the Financial Conduct Authority (FCA) of the UK, located in London. We in the business all know that it is almost impossible to walk down any street in the City of London without bumping into an FX broker. There is a reason for this.
Most FX/CFD brokers who hold an FCA license use this as a badge of honor and as a viable marketing tool. From the retail client’s perspective, a potential place to invest or deposit one’s money, located in London as one of the main centers of global finance, is perceived as an attractive option. Also, should the Forex broker, under the FCA’s regulation, go out of business, the retail trader may be eligible for up to £85,000 in compensation. This level of compensation is almost unheard of in other jurisdictions.
There are three categories of licensing available to Forex/CFD broker services in the United Kingdom. Each has distinct levels of restrictions with corresponding requirements for personnel (often called “substance requirements) and financial commitments.
The Dealer License
This is what is known as a full license and is equivalent to “Market Making” or having the ability to run a B-Book as the client’s counterparty. In any jurisdiction, anywhere in the world, a regulator will ask a broker to prove that they have set aside a required amount of funds. The capital requirement for the FCA’s Dealer License is €730,000.
On top of this, the broker will need a proper operational office based in the UK, directors and a CEO who live in the UK, and other full-time employees engaged in such services as compliance, to name just one. Depending on the size of the firm and its client base, the FCA will set requirements for customer and technical support, sales staff, and accounting staff, for example.
The Intermediary License
This is known as a “Matched Principal” license limiting a broker’s activities to Straight-Through-Processing (STP) of orders to a liquidity provider as an A-Book model. The minimum capital requirement for this license is less than that of the dealer license at €125,000 but the substance requirements would be the same as that of the Dealer License.
The Restricted Broker License
This is a licence allowing sales and marketing of FX and CFD trading services but not the holder is not authorized to hold client funds. In other words, this is a license for an introducing broker (IB) and the capital requirement is €50,000. The nature of an IBs relationship, with a broker with either an intermediary license or a dealer license, would preclude them from having to comply with the substance requirements. The FCA-licensed broker who contracts with the IB would of course be required to comply with all the FCA requirements.
Overview
A Dealer or Intermediary license would allow a firm to offer Contracts for Difference (CFDs) in forex, commodities, futures, and shares to retail and wholesale clients. During the approval process the FCA, like most major regulators, will scrutinise every individual involved ensuring that they have no past negative issues and that they are competent to run a brokerage. The firms must submit comprehensive business plans, KYC, AML, and ATF policies, along with financial projections.
The downside of the FCA regulation is that the offering of CFDs and other derivatives based on underlying crypto instruments is not allowed. This ruling has led some FX brokers to rescind their FCA licenses or apply for a separate license to operate a UK crypto exchange.
