Unregulated Forex Brokers

The recommendation is to only use forex brokers that are regulated by serious financial authorities known for having and enforcing strong trader protection rules. Still, some traders opt to go with non-regulated brokers, or brokers that are regulated by financial authorities that are known to be pretty lax when it comes to trader protection.

If you decide to go with an unregulated broker, you are taking a much bigger risk with your money and your personal data. Below, we will look at a few points that are important to keep in mind if you are interested in trying an unregulated forex broker.

Jurisdiction

For most traders, the best choice is to go with a broker that is regulated and authorized by the financial authority where they live. This means that a forex trader in Australia would pick one of the brokers authorized by the Australian Securities and Investments Commission (ASIC), a trader in the United Kingdom would pick a broker authorized by UK FCA, a trader in the European Union would pick a broker authorized by a financial authority in one of the EU membership countries, and so on. Doing so will reduce the legal complexity and you do no risk ending up in a complicated situation when it comes to jurisdiction and protection.

With that said, some traders live in countries where brokers are either not regulated and controlled, or where the financial authority is known for not providing good trader protection – either because a suitable legal framework is lacking or because they simply do not prioritize online traders. In such cases, some traders opt to sign up with a foreign broker regulated by a strict financial authority in another country. This creates a more complicated legal situation, which is important to remember when you are comparing the risks.

Lastly, some traders – for various reasons – decide to take a risk with forex brokers that either not licensed or authorized by any financial authority, or that are licensed by a financial authority that are known to be very lax when it comes to trader protection. Some of these authorities do have appropriate rules on the books, but when it comes to actually overseeing brokers and acting when brokers break the rules, they are known to remain passive or be overly lenient towards the brokers.

Choosing a non-regulated (or poorly regulated) forex brokers

Here are a few examples of rules that are usually in place when you pick a broker that is regulated by a strict financial authority with strong trader protection. As always, you need to check with the applicable financial authority to see if these points apply, because the exact framework will vary.

When you compare brokers – regulated and non-regulated ones – make sure you take these points into account. Also remember that while some non-regulated may offer one or more points in this list, they are not forced to do it. They may for instance put client money in segregated bank accounts today, but what happens if they one day decide to stop doing it?

Negative Balance Protection For Retail Traders

Many strict financial authorities require Negative Balance Protection for retail traders. This rule is in place to prevent retail traders from ending up owing their broker money if the market moves against them when they are using leverage.

Negative Balance Protection typically gives the broker a right, or even a legal obligation, to close one or more of your leveraged positions automatically if the market moves against you beyond a certain point – and that point can be different from the one involved in a classic margin call. This is one reason why some retail clients sign up with non-regulated forex brokers instead.

Regardless of if you are using a regulated or non-regulated broker, it is very important to find out if your account has Negative Balance Protection, and exactly how it works, before you use any leverage.

Leverage Caps For Retail Investors

Strict financial authorities will typically cap how much leverage a broker is allowed to give a retail trader (non-professional trader). This is to prevent retail traders from using excessive leverage.

Typically, a higher leverage is permitted for major currency pairs than for minor currency pairs and exotic currency pairs.

The leverage caps is one reason why some retail forex traders opt for non-regulated brokers, or brokers regulated by more lenient authorities. They want to use higher leverage and they are okay with the risks involved.

An alternative solution is to qualify as a professional trader. You can contact the broker´s customer service to find out more about the requirements.

Investor Compensation Schemes

In some countries, traders and investors are protected up to a certain amount if an authorized broker is unable to honour their obligations, e.g. if the broker files for bankruptcy and have co-mingled client funds with company funds.

Note: In some countries, this protection only applies to traders within that country. Traders outside that country may not have any rights to compensation.

Dispute Resolution Service

Strict financial authorities with good trader protection will typically offer some form of dispute resolution service. If you run into an issue with your broker and can not resolve it directly with the broker, immediately taking on a full-on court case can be a daunting prospect. Therefore, many financial authorities make it easy to file a complaint directly with them instead. They will investigate the situation, look at information provided by both you and your broker, and come to a decision. In many cases (but not all), this can prevent an issue from escalating to court.

With a non-regulated broker, no such service is available, and you might not even know which country you should turn to in order to have your case tried in court.

Money Segregation

Strict financial authorities will normally demand that the broker keep client money in special bank accounts and never co-mingle this money with the company´s own money. This makes it much easier for traders to get their money back if the brokerage company becomes insolvent.

When money is co-mingled, there is a risk that your trading account balance will not be paid back to you if the brokerage company becomes insolvent, because the money may have been used up by the brokerage company. Without segregation, applicable law may state that you only have an unsecured claim against the company in the bankruptcy hearing, which means that you will have to fight for your money alongside all the other creditors. This is why mandatory money segregation is so important for traders.

Welcome Bonus Ban For Retail Traders

One of the reasons why a retail trader may consider going with a non-regulated (or poorly regulated) broker is the welcome bonus. Many of the non-regulated forex brokers are offering big sign-up bonuses to welcome new traders.

You are not likely to see any welcome bonus offers from a broker regulated by a strict financial authority, because this type of bonus is normally banned – especially when the recipient is a non-professional trader (retail trader). Using welcome bonus offers to entice retail clients is considered predatory by many financial authorities, especially since such offers tend to encourage the trader to make a big first deposit.

If you decide to go with a broker that offers a welcome bonus, make sure you fully understand the terms and conditions. Non-regulated brokers will sometimes encourage a trader to make a big first deposit, and then make it impossible to withdraw any money from the account until a heavy trading requirement has been fulfilled. The freezing of your account can include both the bonus money, your deposit (or deposits) and any profits, so all the money in your account may be frozen from withdrawals until you have fulfilled the trading requirement.

Rules That Promotes Transparency and Fair Trading Conditions

A financial authority can have rules and routines in place that promotes transparency and fair trading conditions. They may for instance require certain types of book keeping and auditing for financial companies, including brokers, that goes beyond those required for the average company. There can also be special rules in place that governs which persons that will be permitted to open, own and run a financial company, e.g. when it comes to their country of residency, financial education and good reputation.

Scrutiny

Strict financial authorities with good trader protection operate under a legal framework that give them an obligation to oversee financial companies, and far-reaching powers to scrutinize and investigate the conduct of such companies, company principals, etcetera.

More Is At Stake Than Your Deposit

When comparing non-regulated forex providers, it can be tempting to give a possibly sketchy one a chance, thinking that the worst thing that can happen is that you lose your initial $10 deposit. Unfortunately, you risk more than that, so it is not a decision to be taken likely.

• In order to comply with legal requirements in place to combat money laundering etc, regulated brokers must typically obtain a lot of personal information from you. You can for instance expect to give them your full name and address, and prove your identity and residency by sending in a copy of your photo ID and utility bills. This is normal, and all the serious brokers will do it, but the routine can also be used by fraudulent brokers to obtain your personal information and use it for identity theft.
• If you install software from a sketchy broker, you risk infecting your device with malicious software.
• Some non-regulated brokers play the long game. You will make a small first deposit, start trading and make a few withdrawals without issue, because they want you to feel safe with them and start depositing and trading bigger amounts. Only when you are in deep will you realize that some fraudulent practises are going on.

Things To Look For When Comparing Non-Regulated Brokers

In absence of strong regulation, other things become more important when comparing brokers. Here are a few examples. Finding out about them will require more effort than simply picking a properly regulated broker.

• Length of Service
  Does this broker have a long track record of being a popular and well-regarded broker? If you can confirm that the company has existed for a long time, can you also confirm that it has been a broker for a long time, and under this management? Sometimes, fraudsters purchase an existing company cheaply, and gives it an overhaul to fit their purposes.
• Track Record
  Look up the brokerage company to see if it has been under investigation for wrong doings and what the investigation concluded. You can also look up the company principals.
• Reputation
  A broker´s reputation is about more than simply staying out of court. Does the broker have a lot of active clients and a good reputation within the trading community? Do you have reason to believe that they actually have the number of active clients they are boosting about? Do you have access to independent reviews that say mostly positive things about the general conduct of this broker?
• Ties to Other Companies
  Some sketchy actors will open a company, run it into the ground, and then promptly open a new one with a clean record. Use your investigative skills to find out if there are strong ties behind the brokerage you are interested in and any previous company or principal with a chequered past.
• Is the Broker Active and Popular in Your Part of the World?
  Some sketchy brokers will behave better on certain markets, where they know that the authorities are likely to clamp down on them if anyone report them for running a non-regulated brokerage. On other markets, they may behave differently.
• The Trading Platform
  Will you be using a well-known third-party trading platform? Or will you use an off-the-beaten-track third-party platform or maybe a proprietary trading platform provided by the non-regulated forex broker?
• Market Price Data
  Is it clear where the market price data comes from?
• Price Structure
  Is the broker offering a transparent price structure that is easy to understand and compare? Or do they seem to be deliberately opaque about spreads, commissions, and other fees?
• Demo Account
  Is it easy to sign-up for a free demo account and use it to thoroughly explore the trading platform and what this broker has to offer? A few examples of warning signs to look for: No Demo Account Not getting access to the Demo Account until you have made your first deposit. The Demo Account is not free. The Demo Account is not filled with play money. You can only browse the trading platform; not actually place orders and test how your trading strategy would play out. The broker demands a lot of personal information from you, even though you are just signing up for a Demo Account. The Demo Account will only be active for a very short time, so you wont have enough time to thoroughly evaluate the broker and platform. A lot of platform features are blocked in Demo Account mode.

Support

For both regulated and non-regulated forex brokers, it is important to check the qualify of the support before you make a decision. In the fast-paced world of forex trading, having access to prompt and helpful support staff during your trading hours is vital.

Here are a few examples of points to check: Is the support actually open and staffed during the stated hours of service? Are the hours of service suitable for your trading plan? Do you get quick and useful help when you try the support? Do you get stuck with a low-quality AI support? Can you get real-time support through phone or live chat, or do you have to sit around and wait for an email reply? Can you only access the support through the trading platform – and if so, what will happen if you run into problems logging in? If you want phone support, do you have to call a support centre in another country and pay for that phone call? Is support available in a language you are comfortable speaking? Is the broker promising English-language support, but when you reach the support, it becomes clear that the support staff is really struggling with English communication? Does the support staff seem knowledgable about trading, forex trading, trading platforms, and so on, or are they just reading from a script and fail to understand the intricacies of the issues you present to them and how to resolve them?