You can ask the broker for their Retail Foreign Exchange Dealer (RFED) number. You can also check with the National Futures Association or the Commodity Futures Trading Commission.
Although unregulated brokers are common, they are by no means illegal. The main thing you stand to lose is your access to recourse. While regulated brokers are not guaranteed to treat you well, they are open to legal scrutiny if they break rules. A regulated Forex broker must, at the very least, follow regulations.
The purpose of regulation is to protect you from undisclosed financial risk, abusive practices like price and order manipulation, and fraud.
There is no single global body governing the forex market to police the massive 24/5 market.Instead, the responsibility mostly falls on a country-by-country basis. Most countries have a regulatory authority that lays down a framework of rules and standards that must be followed by retail forex brokers. These rules include being registered and licensed with the regulatory body, and undergoing regular audits and reviews to ensure that companies comply with the regulatory requirements. Each forex regulatory body operates within its own jurisdiction and regulation and enforcement vary significantly from country to country. In short, regulatory requirements are established where ALL forex brokers under their jurisdiction must comply with. If a forex broker doesn’t comply, the regulatory body has the power to issue fines and disciplinary action. These fines can be substantial and provide a strong incentive for companies to operate within the law.
This is due to stricter requirements:
- Having a local physical office and staff.
- Requiring a large amount of money upfront just to even start the business.
- Plus additional money is set aside to avoid going bust and be able to pay out when their customers win.
- Regularly submitting reports to verify compliance with all license requirements.
Let’s be clear though. A broker that is regulated doesn’t automatically mean you can blindly trust it.
“Strict” Forex Jurisdictions
Most forex brokers regulated in strict jurisdictions are less prone to scams.
“Questionable” Forex Jurisdictions
Here’s a map showing jurisdictions that are questionable with regard to adequate customer protection. Either the jurisdiction is “lightly” supervised by a regulatory agency with minimal requirements (red) or has no supervision at all (black) and allows brokers to self-regulate themselves.
Why should you pick a regulated forex broker?
Due to potential concerns regarding the safety of deposits and the integrity of the broker, accounts should only be opened with brokers that are duly regulated.
5 Tips For Selecting A Forex Broker
1. Regulatory Compliance
2. Account Features
3. Currency Pairs Offered
4. Customer Service
5. Trading Platform
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