Why Should you not go For an Unregulated Broker?

The forex market is swamped with brokers, some of whom are regulated and some who are not. When it comes to choosing a suitable broker to suit your needs, it can be difficult to know which to select – should you go for one of the many regulated brokers or risk going with an unregulated one? Regulated brokers are those who are registered with the financial regulatory body of their country (for example the FCA in the UK) and who must comply with the rules set down by that body.

Regulated brokers must be able to submit evidence of regular audits, must always submit their accounts on time and must adhere to stringent criteria in order to remain on the regulatory body’s lists. Unregulated brokers, on the other hand, do not have to comply with any rules but can behave in any manner they see fit. Here we look at the drawbacks of choosing an unregulated broker so that you can make an informed decision.

Why are Some Forex Brokers Unregulated?

Any online search will reveal numerous reliable forex brokers who boast their regulatory pedigree on their homepage. Being regulated adds to their credibility and helps potential investors to see that they are a trustworthy operation. Despite this, many brokerages operate without regulation in offshore jurisdictions. One of the major reasons that these brokers choose to forego regulation is that this is one way in which they can cut their operational costs.

Obtaining and maintaining a license costs a lot of money, sometimes in the millions, and this can form a barrier to those who are just setting up as a new brokerage service. Another reason is that many of these brokerages are based in offshore tax havens, which enables them to limit their tax burden. Unregulated firms are also able to offer different product ranges or service customers which they would otherwise be unable to serve. Of course there are some unregulated brokers who do not have legitimate business reasons for failing to obtain a regulation license. These take advantage of investors, engaging in fraud or bad business practices which can cause financial hardship to their clients. Traders who choose to invest with an unregulated trader and who encounter problems will have very little recourse and may suffer from significant financial losses.

What are the Risks of Choosing an Unregulated Forex Broker?

Any investor who takes the chance of trading with an unregulated broker is taking a major risk with their money. Traders are protected from mistreatment and fraud when they choose a properly regulated broker and this is vital in any circumstance where things go wrong.

Investors who choose a regulated broker can benefit from financial compensation in the event that their brokerage firm goes out of business and can have peace of mind in knowing that their broker must comply by all the rules and regulations of their regulatory body and therefore they will be safe from mistreatment. Although being regulated can be no guarantee that your forex broker will treat you well, it does help to reassure investors that their finances and personal information is in safe hands.

How to Avoid Unregulated Forex Brokers

Unfortunately, many investors end up getting scammed by unregulated forex brokers as they either are unaware of the importance of choosing a regulated broker or they did not pay enough attention when making their selection. To ensure that you are choosing a reputable and regulated broker, always take the time to thoroughly check the firm’s website to discover their regulatory body and check that their membership is genuine before committing any funds to an account.