By Daichi Hoang of bestforexbrokers.com.
If you currently trade forex or have been thinking about it, the broker you choose to deal with will have a lasting impact on your experience. Pick the wrong one and you might be putting your entire capital at risk.
For any business offering a product or service, a regulatory body ensures that they are held to a strict set of standards and rules in order to be eligible to continue doing business in the country. In South Africa, the Financial Services Board (FSB) acts as the regulator for forex brokers. Many countries have their own regulatory bodies as well, such as the FCA (UK), ASIC (Australia) and CySEC (Cyprus).
What regulation does to protect consumers
Should a regulated broker breach any of the rules, they would be subject to an inquiry and possible sanction, which could include financial penalties, revocation of their licenses, etc. The consumer has a channel by which they can voice their complaints.
But just because a broker is regulated, it doesn’t always mean they will abide by the rules and do the right thing. This applies to any industry; you do have the occasional rogue business ripping consumers off, so part of choosing a reputable forex broker is doing proper research. But as long as you select a regulated broker, at the very least you have a local organisation to take your case to.
Unregulated brokers and horror stories
Things become a lot more risky when you start dealing with forex brokers who are unregulated. Put simply, an unregulated broker answers to no-one and therefore can do whatever they want. Since you are conducting your trades online, you are going to be clueless about what exactly goes on behind the scenes.
One of the most common complaints that you will find on any forex community site is that people have had their trades hit “stop loss” price targets when according to other sources, the price was never reached.
A stop loss is a setting that can be placed on a trade which instructs the trading system to close the trade if the price reaches this set limit. As the name suggests, it prevents an open trade from going too far in the wrong direction, causing losses for the trader. It is generally used as a loss-limitation mechanism.
But sometimes bad brokers will fluctuate the currency prices (note: only if they set their own prices, also known as a Market Maker broker) so that your loss limit is reached, when in fact the real market prices never fluctuated to that point.
No matter which way you look at it, this is pure fraud. However you are left to fight for yourself in a classic case of one person’s word against another’s. The broker will give you their explanation but that’s all you are going to get. You can’t take your case to a regulator to have it independently investigated. The broker is under no obligation to disclose their trading records or be subject to auditing because nobody regulates them.
Another common problem is forex brokers not honouring withdrawals, coming up with various excuses of breaches of the terms and conditions on order to prevent paying out traders their money.
Why unregulated brokers remain popular
Unregulated brokers thrive because there isn’t enough being done to prevent them from reaching South African consumers online. While the major players in the search-engine space, such as Google, are diligent in making sure that all advertisers are regulated for their target countries, many other ad networks don’t have the resources to maintain strict standards across not just this industry but every industry where regulation might be required to protect consumers.
As a simple example, an ad network would have to understand the legal requirements across several hundred countries, multiplied by hundreds if not thousands of categories in order to manage potential advertisers and make sure they aren’t promoting anything illegal or risky to consumers.
While forex may be on their priority list for tighter control, it doesn’t exist right now and leaves South Africans vulnerable to forex brokers advertising unfair advantages over the FSB-regulated brokers.
Bonus offers and promotions
Two such examples of unregulated brokers taking advantage over regulated brokers are leverage (borrowing power based on deposited funds) and sign-up bonuses / trading rebates. In both cases, unregulated brokers are able to offer whatever they want, which always means they appear far more attractive than FSB regulated brokers.
For the forex beginner, these bonus offers and promotions are highly attractive, because it appears that they will have more funds to start out with. But these offers are almost always extremely limited by complex terms and conditions which ultimately prevents the customer from using or keeping any of the bonuses.
South Africans need to protect themselves
Before you get blinded by promises of the highest leverage, biggest deposit bonuses and access to the best trading platform, always remember to look for or ask for the FSB license number. Go to the FSB website and search this number to retrieve the details of the current regulation status of the broker. Only then can you be sure that you are trading with a forex broker who is sufficiently regulated to offer forex trading to South Africans.
In my opinion there is absolutely no need to trade with a broker who is not regulated by the FSB.
There are several credible platforms based in South Africa where you can trade forex so there is absolutely no reason to sign up with an unregulated and dodgy platform. These include Standard Bank’s Webtrader, Sanlam iTrade and PSG online. All of them use the Saxo Bank trading platform but offer different interfaces and educational tools which can include online tutorials. Global Trader and IG.com also offer forex trading. Global Trader is owned by the JSE listed Purple Capital Group and IG is a UK listed company with offices in about 15 countries including a South African office.