Why is regulation important and what does it tell you about the broker?

Regulation is one of the most important points you have to review when choosing your broker and deciding who to deposit your money with. In general, the regulation indicates that a regulatory entity supervises the broker and that to operate, the broker had to comply with certain obligations, such as minimum liquidity, minimum capital, and segregation of accounts, which means that they must keep the clients’ funds in a separate account.

When choosing who to invest your money with, it is essential to ensure that the broker properly regulated reliable company. Financial regulatory bodies supervise brokers and demand specific requirements from them to operate in the market. These requirements are to control the financial system’s functioning and protect the retail investor’s resources. These requirements vary depending on the regulatory entity, but generally require:

  • Segregation of accounts: This means that the clients’ capital or funds have to be deposited in a different account than the broker one, and it is not considered money of the broker. It means that the client’ funds are not affected by the broker’s financial situation and that in the event of bankruptcy or other financial problems, the funds are protected.
  • Minimum capital and liquidity requirements: Brokers have to meet specific minimum amounts of capital and liquidity to cover their financial operations, and generally use banks or other large financial institutions as a backup.
  • Negative balance protection (not all): Some of the regulatory entities require negative balance protection (PSN) from brokers, this means that the investor cannot lose more money than he or she invested (see our post on balance protection negative)

There are several regulatory bodies worldwide, but the most common in the trading world are:

  • UK Financial Conduct Authority (FCA)
  • The Australian Securities and Investment Commission (ASIC)
  • New Zealand Financial Markets Authority (FMA)
  • Cyprus Stock Exchange Commission (Cysec)
  • Spanish National Securities Market Commission (CNMV)

In Europe, most regulatory bodies follow the guidelines of the European Securities and Markets Authority (ESMA). ESMA is a European Supervisory Authority whose objective is to improve European markets’ functioning, strengthen investor protection, and improve cooperation between control bodies.

Most brokers are regulated by various regulatory bodies and can use a specific license to operate in a particular territory. It is worth mentioning that regulatory entities of tax havens such as Seychelles and Belize do not require the same strict requirements as other regulations (e.g., they do not require negative balance protection). Therefore, it is good to be careful with brokers that are only regulated by these agencies or that use those regulations to operate in your country.

For example, Plus500, one of the largest and most reliable brokers, is regulated by all the following entities. It operates with one of these licenses depending on the country:

  • Plus500SEY Ltd is authorised and regulated by the Seychelles Financial Services Authority (Licence No. SD039
  • Plus500SEY Ltd is the issuer and seller of the financial products described or available on this website. Office Address: Plus500SEY Ltd, Room 12, 1st Floor, Kingsgate House | Victoria, Mahé, Seychelles
  • Plus500UK Ltd is authorised and regulated by the Financial Conduct Authority (FRN 509909).
  • Plus500CY Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission (Licence No. 250/14).
  • Plus500AU Pty Ltd holds AFSL #417727 issued by ASIC, FSP No. 486026 issued by the FMA in New Zealand and Authorised Financial Services Provider #47546 issued by the FSCA in South Africa.
  • Plus500SG Pte Ltd (UEN 201422211Z) holds a capital markets services license from the Monetary Authority of Singapore for dealing in capital markets products (License No. CMS100648-1).

* Not applicable to EU clients.

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