Why do brokers need a forex license?

Publication date: 09 Mar 2020

Obtaining a forex license is a very slow and time-consuming process which might take from several months to a year. Moreover, it costs from €60,000 to 200,000. What does a forex broker need a license for, and is it possible to operate without one?

Advantages which licensed forex brokers have include reputation and ability to advertise their services openly.

About reputation
All regulators oblige brokers to provide clients with high-quality services and insure their funds against dealer’s bankruptcy. Therefore, a license is a certain guarantee of broker’s trustworthiness.
Regulators also aim at limiting the maximum leverage ratio and reducing the number of financial instruments in order to protect traders from going deep into the red and to control excessive speculation in the market.
In fact, all these measure do not guarantee stability and trustworthiness of brokers but only give traders sense of security.

The right for advertising
It is impossible to attract clients without investing into advertising. Licensed forex brokers can legally promote their services in countries where forex trading is regulated. In this case, all advertising materials (banners, promo videos, mass media advertising, etc.) are marked with the license number and information about whom the license was issued by and when. It arouses trust among potential clients and strengthens company’s reputation.

Can a broker operate without a license?
On the one hand, having a license improves broker’s reputation, but on the other hand, obtaining one is very time- and money-consuming.
Another option is to register in an unregulated jurisdiction and establish an agent company in Europe to handle all transactions. This second company will need a European bank account to accept Visa/Mastercard payments.
In this case, it costs a broker much less to set the stage for brokering activity: ≥$10,000 for Visa/Mastercard payments and ≥$3,600 for e-wallet payments. It takes 2-3 months, depending on how quickly necessary documents are submitted, to register these two companies and open a bank account.
Having established an offshore company with an agent company in Europe, a broker can successfully operate on the forex market. What traders need from a broker is not the license itself but rather 24/7 support, interesting promotions, fair payouts, low spreads, and a wide selection of payment methods. These are the main factors attracting new traders. Brokers can get around advertising restrictions in regulated areas by providing services from offshore jurisdictions or participating in various conferences and events. Brokers can also buy high-quality traffic, advertise through affiliate networks, with bloggers, or on YouTube channels, etc. No official restrictions are imposed on these types of advertising.

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