Unregulated Forex Brokerages

You may have noticed that there are literally hundreds of Forex brokerages out there, all of them vying for your attention. Some of these brokerages are regulated in well known regulatory jurisdictions while other brokerages operate without any regulatory oversight often from offshore territories. So what exactly is the deal with these brokerages which choose to operate from unregulated jurisdictions?

Why do brokerages choose to operate without regulation?

1) Regulatory Costs

Many of you will know that obtaining authorisation from one of the more well known and established regulators is particularly costly. Firstly, firms are required to set aside significant amounts of capital to ensure that the firm is able to operate safely. Secondly, there are significant legal and administration costs for firms wishing to obtain and maintain a regulatory licence in a jurisdiction with a tough financial regulator. While financial regulation provides significant protection for customers, many newer companies often have a hard time raising the funds to become regulated in countries with tough regulatory laws. In recent times there has been a trend among brokerages to start out operating from an offshore location before moving onshore when they have raised enough funds to become licensed. 

2) Tax Reasons

Many off the offshore locations popular among Forex brokerages have very favourable tax legislation. Many of these offshore tax havens require that companies registered in the jurisdiction are not required to pay tax on profits made outside of the territory. As the vast majority of the firm’s clients are based outside of these offshore havens, the firm will be required to pay very little if any tax on their profits. Operating from a favourable tax jurisdiction can help smaller firms remain competitive with their larger counterparts and is clearly a big reason why many firms choose to have offshore operations. 

3) Rogue Firms

While many firms which operate without being regulated are not rogue and do not mistreat customers there have been a number of cases where firms have manipulated/mistreated their customers. The fact firms are able to operate from secrecy jurisdictions and without any regulatory oversight means that there can be very little comeback for clients if the firm decides to mistreat their customers. As with many other financial products, rogue individuals have been attracted to operating such companies and firms, which has left many people with a rather bitter taste. Often it is this reason why many individuals are keen to avoid doing business with unregulated firms. 

Should customers avoid unregulated brokers?

This is quite a tough question as peoples experiences with unregulated brokerages vary massively. It is important for traders to realise that if they choose to trade with an unregulated brokerage, they won’t receive many of the valuable protections provided by operating with a brokerage regulated in a tough regulatory regime. Recent scare stories regarding unregulated brokerages are sure to have put off many individuals, with 4XP recently appearing to have gone under possibly with significant amounts of client money. Situations like this certainly makes it worth your while to follow sites like ForexMagnates and Fx View which cover a lot of the important regulatory news. On the other hand many people have only positive things to say about some brokerages which operate offshore and aren’t currently regulated. The fact that there are many regulated brokerages which provide customers with a very high level of service should be enough for most people to avoid trading with an unregulated brokerage.