If you’re considering opening a brokerage, the issue of regulation is of utmost importance, and one which you must take into account as part of your business plan, marketing efforts and daily operation. It is an integral element of the finance world which makes a difference, and industry statistics have proven that regulated brokerages enjoy increased longevity, trader loyalty, and are thus more profitable over time.
Up until recently, the Forex industry was a loosely regulated domain within the financial world. While international treaties and local laws have long governed and regulated public institutions such as stock exchanges, large banks, and brokers that wanted to work with these institutions, an extremely rapid technological development that resulted in the internet as we know it today opened the door for a new niche that allowed anyone with a vision to open and operate a brokerage.
While this development opened the door for honest businessmen with a positive vision and goal to succeed in a market that was no longer a closed and exclusive member’s club, it also left a broad gap that could also be used by less forthcoming entrepreneurs with a less positive vision. The latter’s misconduct resulted in the besmirching of this entire financial industry and prompted a decision to find a solution that will restore public trust in the organizations and companies responsible for driving the global economy in a forward direction.
As a result, several international bodies have been established in the last decade as reliable and honest industry regulators, and their stamp of approval has not only been proved to be a reliable indicator of a brokerage’s good and honest conduct, but have also been added as a legal requirement for operating brokerages in most countries.
The inclusion of regulation into the legal requirements for operating a brokerage in most countries has created a situation in which brokers that do not comply with regulation requirements expose themselves not only to losing clients, especially since virtually all traders today know about regulation and how it protects them, but also to legal action and extreme financial losses. Here are a few examples:
- Payment providers in regulated countries can deny services to brokerages that operate without regulation. Even if you are an unregulated broker that somehow managed to obtain their services, they still retain the right to unilaterally stop providing service – resulting in an instantaneous halt in transactions. With overhead expenses still accumulating until the problem is solved, the financial loss can amount to an enormous sum.
- Banks are essential for any broker. In a digital world where walking into a bank or brokerage with a suitcase full of money no longer happens, a legitimate bank account is needed in order to store the money you made. With local laws in most countries favoring regulation, most of the world’s respectable and reliable banks can, and often do, refuse to open accounts for brokers who do not have proof of compliance. No account means no deposit and no income.
- Another problem that arises from lack of regulation is that your brokerage will be banned in most of the western world. For instance: you will not be able to market to the United States, EU member states, Japan and other major countries. Furthermore, operating without regulation in countries where it is required by law is a prosecutable offense, one which can easily be avoided by becoming regulated.
Naturally, regulation imposes restrictions that may seem hindering in the short term, such as the prohibition of describing online trading as a guaranteed investment, promising profits to potential traders, giving bonuses to salespeople according to number of deposits, etc. Regulation also requires you to file scheduled reports about the actions and the volume of deposits in your trading platform. But the benefits far outweigh the cost for brokers that comply.
In our opinion, the question of whether to become regulated or not is not a dilemma. Operating unregulated leaves you with dubious target markets that do not make large deposits, if their credit cards even go through, turning your brokerage to a mediocre business, going after the lowest hanging fruit.
Instead get regulated, comply with the required bureaucracies, and make sure that your brokerage can, and does, target markets with as much potential as possible. Remember that in this industry, it is easier to catch one big fish in good water than 20 small fish in a swamp.