Visit any trading website and you’re likely to see the importance of regulation when selecting a Binary Options or Forex broker mentioned more than once. The reason behind this is simple – many consider regulation to be an important attribute of the integrity of an option broker in the UK.
Regulators are state operated agencies which enforce rules on brokerages so to protect trader interests and assure a healthier competitive atmosphere. The United Kingdom’s Financial Conduct Authority (FCA) is widely known as one of the most reliable and strict regulators in the world. It is the replacement of the Financial Services Authority (FSA), which was split into two different agencies in 2013.
Hence, when it comes to choosing a binary options broker, those that have a regulatory stamp of approval from the FCA are considered to be some of the safest in the world.
What are FCA Responsibilities?
The FCA handles a considerable segment of the financial industry, which includes overseeing the actions of a large number of binary option broker regulation. In doing so, they have set forth a number of rules which brokers must comply with in order to remain in operation. Some of the more interesting rules are of course centered on the protection of traders, including the following:
Segregated Accounts: Whenever a trader makes a deposit with a broker that is regulated by the FCA, the money is not directly transmitted to the broker. Instead, the funds are held by a bank that meets the approval of the FCA. The broker does have some access to the funds, but that access is limited. The broker is not allowed to use client funds for its own expenses, such as for marketing or advertising, paying their employee wages, etc. This level of protection also safeguards against any unscrupulous staff members who are employed by the broker. This also helps traders when it comes to option money management.
Capital Requirements: To be able to legally operate as a broker in the UK, a company must have holdings that meet the current requirements. This rule was put in place to ascertain that the company is financially secure. It also works to verify that a company is serious about being in business and is not a, “fly by night” brokerage that may set up shop and then fold soon after.
Compensation Scheme: Each broker that is regulated by the FCA is required to take part in the Financial Services Compensation Scheme. This is a procedure by which brokers put aside a share of their revenues in a pool. These funds are then utilized as a form of guarantee, protecting the funds of traders. If the broker does go bankrupt, each client would receive a lump sum payment. This has actually happened in the past when Forex broker Alpari filed for bankruptcy.
While the FCA is known for being one of the top regulatory agencies, there are a few global practices they have not yet put in place, particularly with regards to forex trading. One example is the fact that there is First In, First Out rule. In some countries, including the United States, a trader is not allowed to have both a long and a short position open on the same trade simultaneously.
In other words, hedging is now allowed. The FCA also does not have any limit on leverage. In some locations, there are set limits laid out for brokers. The goal is to protect beginner level traders who do not yet have a complete understanding of margin trading.
Making Markets Inclusive
The Financial Conduct Authority (FCA) is designed to encourage individuals to take part in financial markets across the United Kingdom with confidence. Indeed, traders should be able to trust the brokers with whom they choose to trade with. The FCA regulates not only brokers, but also firms and financial advisors to make sure that the markets are secure.
When it comes to regulation, the FCA is accountable for the behavior of over 25,000 finance companies across the country. In addition to that, it also oversees the standards of roughly 23,000 of these companies. The FCA takes the task of protecting consumers seriously, and continuously implements and re-evaluates rules so as to prevent traders from becoming targets of fraud or other unethical practices.