Why Traders Should Choose Reputable Brokers

Regulation is one of the most important practices in the financial industry. It keeps customers safe, ensures market integrity, and incentivizes competition on a level playing field by making financial companies and reputable brokers follow a strict code of conduct overseen by a particular regulatory body.

In the UK, this is the Financial Conduct Authority (FCA). The FCA currently oversees the conduct of approximately 58,000 businesses, many of which offer financial services to retail investors buying and selling stocks, forex and other assets. There are a number of different regulatory bodies around the world doing the same thing. These include the Cyprus Securities and Exchange Commission (CySEC) and the Australian Securities and Investments Commission (ASIC).

Another widely respecting regulatory body is the European Securities and Markets Authority (ESMA), which keeps a close eye on the financial markets across Europe. Recent updates to its guidelines meant that financial companies had to reduce leverage in forex and CFDs to a maximum of 30:1, while ensuring that their “marketing messages” are the same across platforms, including their websites and social media.

In terms of the FCA, its power is significant as it can freeze the assets of an organization that it believes may have breached its standards and requirements. These requirements can be quite complex and include the segregation of accounts, minimum capital and liquidity requirements, and negative balance protection. Financial companies have to meet these standards in order to operate and face significant consequences if they don’t maintain them.

Because the FCA’s main objectives are to authorize financial service providers, supervise standards and impose penalties on those that breach regulations, it is crucial that those operating in the industry are always proactive about regulation. They must implement their own stringent standards based on regulation to deliver safe, high-quality experiences to traders.

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What are the advantages for a broker?

Reputable brokers seek regulation to legitimize their companies and build trust with clients, who are often concerned about being scammed and losing their money. Adhering to regulation also brings about improvements in transparency for the industry; avoids the creation of monopolies, while helping to create healthy competition between companies; and minimizes excessive risk-taking, which can destabilize the industry.

Brokers that breach regulation can suffer significant consequences, with the most serious cases leading to major regulatory and criminal actions. Falling foul of stringent standards can be a death knell for financial companies as they are added to public blacklists, which can make it very difficult to attract potential clients.

Why are there unregulated brokers?

As regulation is high on the priority list for reputable brokers, why do some operate without any regulation? A financial company can benefit in some ways, at least in the short term, by opting to operate without licenses. Doing so can reduce operational costs, as obtaining and maintaining licenses does take time, money and manpower. However, the most obvious reason is the desire to offer risky financial products and conduct scams that steal traders’ funds.

Why should traders always use regulated brokers?

While a broker can benefit from being unregulated, there is no upside for a trader. Selecting an FCA-regulated broker should be a top priority for those looking to open an account and trade stocks or forex. That’s why you should read reviews and seek out up-to-date information about the best FCA-regulated brokers available from a leading financial consultant.

By conducting due diligence and selecting a broker with a relevant regulatory status, either with the FCA or another trade body, you will have the peace of mind that the funds will be returned to your account if you want to cash out after closing a position. For new and experienced traders alike, this is critical as a single scam can wipe out a person’s entire investment fund.

Most of the benefits of regulation are linked to account safety but also manifest in other account features. For example, the use of leverage can help a trader to access more capital, but it can also be risky for the trader. This is why regulatory bodies often limit the maximum amount of leverage offered. While you may not know this at the time when selecting a broker, it will add an additional layer of security to your funds.

Traders will also have recourse in the form of financial compensation if a regulated broker does go bust. This would not be the case with an unregulated broker as your funds will be lost. Regulation is critical for everyone operating in finance, both for financial institutions and traders, so it makes sense to be hyper-conscious of it when selecting a broker to buy and sell assets.