Is your forex broker regulated? How to check a licence.

A broker's website can say regulated in large letters and still leave you with little protection. The word only means something once you have found the licence on the regulator's own website and confirmed it belongs to the company holding your money.

What does it mean for a broker to be regulated?

A regulated broker is a company that a government-backed authority has licensed to offer trading to the public. The authority sets rules, inspects the firm and can fine it or withdraw its licence.

The licence belongs to a legal entity, a registered company with its own name and number. A brand name or a logo holds no licence on its own.

The previous lesson showed that a broker holds your deposit and fills your orders. Regulation is the outside check on how it handles both.

Which regulators supervise retail forex?

Each country decides who may offer leveraged trading to its residents. A few regulators are well known among retail traders, and each one keeps a public register you can search.

Inside the European Union, a firm licensed in one member state can usually offer its services in the others through passporting. The home regulator, such as CySEC for a Cyprus firm, stays responsible for supervising it.

Many brokers also hold licences in smaller financial centres, such as Seychelles or Mauritius. Rules there on client money, compensation and leverage are usually lighter, so read what that authority requires before you rely on it.

Some places register companies without supervising their trading business at all. A company registration number is a different thing from a licence to deal with clients.

What does a licence protect, and what does it leave out?

Rules differ by country, so check each of these for the regulator that covers your account. Strong regimes tend to include most of them.

• Your deposits are kept in bank accounts apart from the broker's own money, a rule called client money segregation, so the firm cannot spend them on its bills.
• Some countries run a compensation scheme that can pay eligible clients, up to a set limit, if a firm fails and client money is missing. The UK's FSCS and Cyprus's Investor Compensation Fund are two examples.
• Many regulators require a formal complaints process, and some give clients access to an independent dispute service.
• Under current rules, retail clients trading CFDs in the UK and the EU have negative balance protection, shown in the example below.

A worked example: a weekend gap

Say your balance is $1,000 and you hold a buy of 0.50 lot of EUR/USD over the weekend. Each pip is worth 50,000 × 0.0001 = $5.

On Monday the market opens 260 pips below Friday's close. Your stop out cannot fill at prices that never traded, so the trade closes at the first available price.

1. The loss is 260 pips × $5 = $1,300.
2. The balance after the loss is $1,000 − $1,300 = −$300.
3. With negative balance protection, the broker resets the balance to $0, so your loss stops at the $1,000 in the account.
4. Without it, the broker can ask you to pay the missing $300.

The numbers are illustrative. Gaps this large are rare on EUR/USD, though sudden events have moved some pairs much further in a single jump.

Some brokers outside the UK and the EU offer the same protection as company policy. Look for it in the client agreement, because that document is what binds the broker.

A licence does not cover losses from your own trading decisions. It also says little about cost, so a regulated broker can still charge wide spreads or widen them in fast markets.

Which company is your account really with?

A broker brand often runs a group of companies. One might hold a UK licence, another a Cyprus licence and a third an offshore licence, all sharing one logo and one website.

When you sign up, the group decides which company opens your account, often based on where you live. Your protections are those of that company's regulator, whatever the homepage says about the group.

To find out which company you have, open the client agreement or the account opening documents. The legal name there, often ending in Ltd or LLC, is the one you look up on the register.

This matters when you compare brokers too. The guide to choosing a broker treats the licence of your own entity as the first filter.

How do you check a licence on the register?

The check takes a few minutes. Do it before your first deposit, and again if the broker asks you to move your account to another company in its group.

1. Find the legal entity name and licence number in the website footer or the client agreement.
2. Type the regulator's web address yourself, or find it through a search engine. A link supplied by the broker could lead to a copied page that only looks official.
3. Search the official register by licence number, then by company name.
4. Match the website, email and phone on the register with the ones the broker uses.
5. Check the permissions, the current status and any warnings. A firm can be listed yet no longer authorised, or authorised only for professional clients.

Use this table for steps 4 and 5, where every row should agree.

The web address and contact details are the strongest test. A fraudster can copy the name and number of a real firm, but the website listed on the register still leads to the genuine company.

What if the details do not match?

A scam that copies the details of a licensed company is called a clone firm. The FCA uses this term and publishes warnings about clone firms it knows of.

If the website or phone number differs from the register, contact the licensed firm through the details on the register. Ask whether the site you found is theirs before you send any money.

Also search the regulator's warnings list, where many regulators name unlicensed firms targeting their residents. IOSCO, the international body of securities regulators, gathers such alerts from many countries in one searchable portal called I-SCAN.

If a broker gives no licence number, or the number leads to a different company, treat it as unregulated. The lesson on red flags and the guide to common forex scams cover other warning signs.