Brokers

What are the regulatory differences

The United Kingdom and the European Union are among the strictest regulatory jurisdictions out there.

The regulatory bodies of each member-state and the Financial Conduct Authority (FCA), that oversees the UK markets, are revered for the high degree of safety that has been provided to the retail Forex trader as a result. However, since the UK is not a member-state of the EU anymore, and has not been for a while, the FCA has been free to introduce other regulatory measures, which have set the legal framework of what brokers have to comply with on a different path.

This translates to a different trading experience for the client – features that are available with UK forex brokers like spread betting and an access to a higher compensation in the case of a broker going under, are not available under the EU regime. Therefore, it is important to trade with a broker that is able to provide you with the service that is best for you. Below, we have outlined what kinds of services and protections you can expect from brokers licensed in either the EU and the UK:

The introduction of strict regulation in the UK and EU in 2018

Back in 2018, while the UK was still a part of the EU, the European Securities and Markets Authority (ESMA) introduced a product intervention, significantly changing the way brokers in member-states provided their services. These sensible measures have provided the backbone of regulation in both jurisdictions, as the EU regulation was transposed in Britain by the FCA.

A lot can be said about this intervention and how it has shaped the markets – the new requirements focused on restricting the risk to the retail client and curbing illicit practices from brokers.

Leverage

The ESMA measures included a significant restriction on the leverage available to the retail client. At the time of writing, that leverage for FX majors like the GBPUSD and EURUSD  is of up to 1:30 in both jurisdictions. Clients still would often open positions that could lead to margin calls, but the access to a lower leverage has reduced the risk.

Negative balance protection

Before the new 2018 rules, clients from both UK and EU could end up owing money to the broker in the event of a margin call, as would have to cover the broker’s losses. After the ESMA intervention, however, brokers were required to maintain a Negative Balance Policy, which made it so no client can lose more than the size of its deposit.

Compensation funds

As per ESMA rules, each company in both EU and UK is supposed to participate in guarantee funds that restore up to €20 000 per affected client in the case of a broker going under. In the UK, however, that amount was set to £85 000, to better protect the retail client.

The post-Brexit developments in the UK Forex regulations

As you can see, there were a lot of similarities in the regulatory regimes before Brexit – and all of these measures are still in place in both UK and EU. However, following Brexit, the FCA was free to make different steps in regulating the markets, that have furthered the difference between the two jurisdictions. UK took a rather different and much stricter approach to regulation than the average EU member-state.

UK banned crypto CFD

One of the first regulatory decisions that the UK made after Brexit was the wholesale ban on the sale of crypto-derivatives to the UK client. The 2020 crypto derivatives ban was unprecedented, and the reasoning for it was to protect the retail client from the dangers these assets presented. The FCA cited their prevalence for scams, their incredible volatility, the lack of understanding of the crypto assets by the retail client and others.

This decision market the first serious difference between EU and UK brokers – the former were still free to offer the dangerous assets, and even provide access to leveraged trading for them, albeit at a very low 1:2 leverage. The ban was estimated to save the retail clients in the UK about £53 million in 2020 alone. With the recent crypto market crash, the reasoning of the FCA behind it stands tall.

Higher minimum capital requirement

The Financial Conduct Authority has also recently announced it would work on further strengthening the regulation in the country. One of the measures it has mentioned could be introduced is a higher minimum capital requirement for the provision of a broker license – the current amount of €730 000 is a remnant from before Brexit and is what is required by brokers in EU member-states at the time of writing.

The FCA has stated this minim capital requirement is rather insufficient to achieve its designed goal – providing insurance that companies have the necessary liquidity to meet expenses, so they do not go under. If the new set of measures are adopted by the FCA, it would mean another difference in the regulatory measures of Britain and the EU.

We would also like to mention the fact that at the time of writing there are some specificities of the UK Forex market that are not related to the FCA, but, rather, to what traders on the market themselves are after. For example, spread betting, unlike forex, is tax free in UK and very popular among local traders, but not really present on the EU markets at all. UK brokers have leaned in this kind of product and most of them offer it to their clients quite readily.

Conclusion

To sum up, there are still some similarities between the British and the EU’s regulatory regimes. There is a similar restriction on the available leverage, and there is also the requirement for brokers to provide access to a Negative Balance Protection.

However, there are also some stark differences – for instance, the ban on crypto assets in the UK, and the provision of more money in the case of a broker going under, have made the two regulatory frameworks distinct from each other.

With the continued work of the FCA towards making the UK markets a safer place and the quicker pace at which regulation can be introduced in the UK compared to the EU, there is no doubt the divide between the two will only grow.

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