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The Ultimate Guide to Regulation in the Online Brokerage Industry

Trading commodities can be a risk which is why you don’t want to compound that risk by taking a gamble on using an unregulated broker. All brokers we review and recommend and regulated by Government agencies that safeguard the general public. These agencies wield powers to sanction firms that fail to adhere to their standards. Ultimately, they help protect the integrity of the brokerage industry.

Unfortunately not all regulators are born equal. We examined some of the most important global regulatory agencies to provide you with facts about how safe your online broker really is.

Contents

Australian Securities and Investments Commission

The Australian Securities and Investments Commission (ASIC) is an independent Commonwealth Government body that serves to regulate the corporate, markets, financial services and consumer credit sectors in Australia. According to the ASIC website, the broad goals of the agency are “promoting trader and consumer trust and confidence, ensuring fair and efficient markets and providing efficient registration service.

Who Does ASIC Regulate?

Companies, financial markets, financial services organizations and professionals that operate in Australia and deal and advise in investments, superannuation, insurance, deposit taking and credit.

What Does ASIC Do?

ASIC operates under the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the Corporations Act 2001. These acts give the agency power to maintain and improve the way markets perform and to advocate for confident and knowledgeable participation by traders and consumers in the financial system.

What Powers Does ASIC Have?

  1. Registering companies, investments, auditors and liquidators
  2. Granting financial services licenses
  3. Maintaining public records on companies and financial service providers
  4. Making rules to ensure integrity of markets
  5. Investigating breaches of laws and issuing infringement notices
  6. Administering trader compensation schemes in the event of broker insolvency

How Does ASIC Protect Investors?

As the ultimate financial regulator, ASIC ensures that markets and their participants operate efficiently, honestly and fairly.

Interesting Fact

ASIC began regulating licensed equity, derivatives and futures markets in 2010.

Reputation

Some critics have accused ASIC of having a political agenda. However, Australian financial markets have a stellar reputation, and most see ASIC as an honest and strict enforcer of securities laws.


Commodities Futures Trading Commission

The Commodities and Futures Trading Commission (CFTC) is an independent US government agency that regulates futures and options markets. The agency began its work in 1975 after Congressional authorization. Subsequent US legislation, including the Dodd Frank Act of 2010, expanded CFTC’s authority.

Who Does CFTC Regulate?

CFTC regulates all individuals and firms engaging in commodity and futures trading in the United States including over-the-counter derivatives markets, exchange-based commodities and futures markets, foreign exchange markets and options on futures markets.

What Does CFTC Do?

The CFTC mission is to facilitate “open, transparent, competitive, and financially sound markets.” The agency works to limit systemic problems and safeguard market participants, consumers and the general public from fraud, manipulation, and abusive practices.

What Powers Does CFTC Have?

  1. Policing the derivatives markets for abuses
  2. Establishing regulations for commodities markets
  3. Overseeing and enacting regulations for designated contract markets (e.g., crude oil, heating oil and copper) and swaps markets
  4. Regulating commodities markets to ensure fair and orderly trading

How Does CFTC Protect Investors?

The CFTC brings enforcement actions against market violators. The agency also operates a disposition program through which it helps resolve disputes between customers and investment professionals.

Interesting Fact

CFTC considers cryptocurrencies to be commodities and, therefore, regulates the industry.

Reputation

The CFTC has won some key enforcement victories including its successful LIBOR manipulation settlement with Barclays in 2012. However, the agency has received criticism for being understaffed.


Cyprus Securities and Exchange Commission

The Cyprus Securities and Exchange Commission (CySEC) is the financial regulatory agency of Cyprus. As an EU member state, Cyprus’s financial and securities laws must comply with Europe’s Markets in Financial Instruments Directive (MiFID), which coordinates financial regulations across the EU region. When Cyprus joined the EU in 2004, CySEC joined the MiFID framework.

Who Does CySEC Regulate?

CySEC regulates current and former Cypriot investment firm, Undertakings for Collective Investment in Transferable Securities (“UCITs”) and management companies, Alternative Investment Funds and their managers, regulated markets, issuers and Administrative Service Providers (ASPs),

What Does CySEC Do?

CySEC oversees the entire regulatory and risk-based framework for financial companies and traders operating in Cyprus. The agency is responsible for investment services laws, transparency laws, short selling and market abuse among other areas.

What Powers Does CySEC Have?

  1. Granting and suspending financial services operating licenses
  2. Supervising and regulating stock markets and agencies under its supervision
  3. Imposing disciplinary sanctions provided by law
  4. Issuing regulatory directives
  5. Applying to appropriate courts to enforce laws
  6. Cooperating and sharing information with other Cyprus agencies

How Does CySEC Protect Investors?

CySEC serves as an ombudsman for markets. The agency collects complaints regarding investment firms, processes whistleblower complaints and oversees the Investor Compensation Fund.

Interesting Fact

CySEC is the first financial regulator to globally recognize and regulate binary options as financial instruments.

Reputation

In the past, European authorities have criticized CySEC for its lax oversight of retail brokers. However, the agency has improved many deficiencies in its regulatory practices.


Federal Financial Supervisory Authority

The Federal Financial Supervisory Authority (BaFin) is an independent federal institution and the financial regulatory authority in Germany. Legislation in 2002 merged three predecessor agencies and empowered BaFin as the principal financial regulator.

Who Does BaFin Regulate?

BaFin oversees banks and financial services providers, insurance undertakings and pension funds, stock exchanges and markets, asset management and investment firms, securities and investment prospectuses, start-up companies, fintech firms, cross-sector issues such as Brexit and supervisory disclosures.

What Does BaFin Do?

BaFin is responsible for the overall protection of consumers in financial services and markets. The agency administers a consumer helpline and assists with resolving customer disputes with its regulated entities. BaFin also administers deposit and trader compensation schemes and helps educate consumers about banking and loan charges, insurance products and investing.

What Powers Does BaFin Have?

  1. Supervising the German banking industry (along with the Deutsche Bundesbank)
  2. Assisting in supervision of the European banking system
  3. Ensuring that credit institutions and financial institutions meet capital and liquidity requirements
  4. Ensuring that investment prospectuses contain sufficient information

How Does BaFin Protect Investors?

BaFin enforces rules on insider trading, market manipulation, short-selling, high-frequency trading and transparency

Interesting Fact

BaFin established a whistleblower program in 2016 and received 400 disclosures of suspected misconduct in its first year.

Reputation

BaFin enjoys a solid reputation as a reliable consumer watchdog agency.


Financial Conduct Authority

The Financial Conduct Authority (FCA) is a UK financial regulatory body that operates as a non-governmental watchdog group for the financial services industry. The aim of the FCA is to protect consumers, enhance market integrity and promote competition. The agency formed as a result of passage of the Financial Services Act of 2012 and replaced the Financial Services Authority.

Who Does FCA Regulate?

FCA regulates banks, credit unions, consumer credit firms, electronic money institutions, financial advisers, fintech businesses, insurers, investment managers, mortgage lenders, mutual societies, payment institutions, sole advisers and wealth managers.

What Does FCA Do?

FCA establishes listing rules for public companies. The agency also helps implement European Market Infrastructure and MiFID Regulation on derivatives. FCA also regulates benchmarks and establishes regulations related to securities depositories.

What Powers Does FCA Have?

  1. Enforcing competition laws that prevent cartels and anti-competitive agreements
  2. Enforcing consumer protection laws through civil, criminal and regulatory means
  3. Requiring regulated firms to comply with the FCA Handbook
  4. Registering and supervising financial firms that operate in the UK

How Does FCA Protect Investors?

FCA enforces rules on market abuse, short selling and transaction reporting. The agency also levies fees on FCA member firms, which help fund the Financial Services Compensation Scheme (FSCS). FSCS provides compensation to traders when financial firms become insolvent.

Interesting Fact

The FCA is the conduct regulator for 56,000 UK financial services firms.

Reputation

FCA has a reputation as a tough advocate for small traders and has taken a hard line against financial firms that abuse consumers. If your chosen broker is overseen by the FCA then not only are you likely to be afforded the greatest level of consumer protection of all the regulators listed here (in the form of the Financial Services Compensation Scheme) but it also means that your broker has met the FCA’s stringent standards.

The UK’s Financial Conduct Authority is arguably the gold standard of regulators.


Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA) is a not-for-profit organization authorized by Congress to protect American traders. The organization was formed in 2007 as a self-regulatory organization and is the successor organization to the National Association of Securities Dealers.

Who Does FINRA Regulate?

FINRA regulates broker-dealers and funding portals operating in the United States.

What Does FINRA Do?

FINRA is the watchdog group for the US brokerage industry. The organization regulates brokers, examines their actions and searches for misconduct by market participants.

What Powers Does FINRA Have?

  1. Writing and enforcing securities laws for brokers
  2. Examining broker-dealers to ensure their compliance with rules
  3. Disciplining brokers who break rules
  4. Employing technology to scan markets for abuses

How Does FINRA Protect Investors?

FINRA ensures that anyone who sells a securities product has been tested, qualified and licensed. The organization also ensures that statements about investments are truthful, that brokers make sure the investments they sell are suitable for their clients and that trader receive proper disclosures about investments.

Interesting Fact

Every day FINRA processes between 37 and 75 billion transactions to build a picture of US market trading.

Reputation

FINRA has a reputation for using sophisticated technical tools to find market abusers. However, some say the organization spends too much energy chasing small violators, while letting large firms go unchecked.


Financial Markets Authority

The Financial Markets Authority (FMA) is the regulator of financial markets in New Zealand. Established as a result of the Financial Markets Authority Act 2011, the FMA has a mission to “promote and facilitate the development of fair, efficient, and transparent financial markets.”

Who Does FMA Regulate?

FMA regulates auditors, authorized financial advisers, brokers and custodians, crowdfunding platforms, directors and officers of companies, derivatives issuers, equity and debt issuers, financial market infrastructures, fund managers, independent trustees, market operators, peer-to-peer lenders, qualifying financial entities and advisers, registered financial advisers and supervisors.

What Does FMA Do?

FMA enforces securities, financial reports and company laws pertaining to markets. The agency also regulates securities exchanges, financial advisers, brokers, auditors, trustees and issuers. FMA also provides information and guidance to market professionals and firms.

What Powers Does FMA Have?

  1. Setting and enforcing standards for market participants
  2. Monitoring and assessing compliance, conduct and competency of market participants
  3. Investigating market misconduct and enforcing related laws

How Does FMA Protect Investors?

FMA ensures a level playing field for traders through its regulations. The agency licenses firms and professionals operating in the securities industry, investigates market abuses, takes actions to remedy abuses and routinely assesses compliance of market participants. FMA has authority to seek compensation for traders for broker breaches of conduct.

Interesting Fact

In 2015, FMA enforcement actions against the directors of several companies returned $18 million to traders.

Reputation

In its short history, FMA has shown a willingness to aggressively go after market abusers.


Financial Markets Supervisory Authority

The Financial Markets Supervisory Authority (FINMA) is a government agency responsible for financial markets regulation in Switzerland. FINMA is an independent legal body and reports directly to the Swiss parliament. A federal act established the agency in June 2007.

Who Does FINMA Regulate?

FINMA regulates banks and securities dealers, insurers, institutions and products subject to the Collective Investment Schemes Act, insurance intermediaries, self-regulatory organizations, financial intermediaries, financial market infrastructure, foreign market participants, ratings agencies and fintech companies.

What Does FINMA Do?

FINMA engages in forward-looking supervision of the financial sector. The agency employs a risk-based approach, which means it supervises more intensely those areas of the financial sector where risk is greatest. FINMA issues licenses to financial participants and assigns categories of risk, which determine levels of supervision.

What Powers Does FINMA Have?

  1. Investigating suspected violators of laws and regulations
  2. Initiating enforcement proceedings against suspected violators
  3. Imposing measures and penalties on violators
  4. Monitoring securities markets
  5. Collecting data to monitor conduct of market participants

How Does FINMA Protect Investors?

FINMA monitors financial institutions and markets to ensure that they function properly. The agency aims to protect clients of financial institutions against institutional insolvency, disreputable business practices and to ensure equitable stock exchange execution. However, FINMA does not settle claims by traders. Only civil-law courts or arbitration hearings can settle those claims.

Interesting Fact

FINMA has the power to outsource its work to third-parties, known as mandatories, to assist in performing its duties.

Reputation

FINMA’s mandate to protect the reputation of Swiss banks may present a conflict of interest with its mission to protect individual traders. Historically many Swiss banks have been used for money laundering.


Financial Services Agency

The Financial Services Agency (FSA) is an integrated government agency in Japan responsible for overseeing the country’s banking, securities, exchanges and insurance sectors. The agency, which was founded in 2000, reports to the Ministry of Financial Services.

Who Does FSA Regulate?

FSA regulates major banks and brokers, foreign bank branches, regional financial institutions, insurance companies, financial services companies, credit rating agencies, trust companies, financial conglomerates, money lenders, credit guarantee corporations and the general infrastructure of financial markets.

What Does FSA Do?

FSA engages with businesses to ensure that they have effective business models, risk management procedures and financial stability. The agency also serves as a consumer protections watchdog. FSA ensures the integrity and facilitates the strength of securities markets.

What Powers Does FSA Have?

  1. Planning and making policies regarding the financial system
  2. Supervising private financial institutions
  3. Developing rules for conducting business in financial markets
  4. Developing accounting rules and procedures and supervising accounting firms

How Does FSA Protect Investors?

FSA conducts onsite inspections of financial services businesses to root out compliance infractions and evidence of misconduct. The agency also promotes transparent disclosure of fees and business practices by financial institutions. The FSA also devotes resources to finding the root causes of compliance infractions and remedying them with new regulations.

A separate entity called the Japan Investor Protection Fund manages the trader compensation scheme.

Interesting Fact

On September 29, 2017, the FSA officially endorsed 11 cryptocurrency exchanges.

Reputation

FSA has recently taken a more proactive approach toward banking and securities regulation in Japan, which bodes well for consumers.


Financial Services Board

The Financial Service Board (FSB) is a financial regulatory agency in South Africa responsible for supervising and overseeing non-banking financial services companies. The agency’s mission is to promote a sound financial investment environment in South Africa.

Who Does FSB Regulate?

FSB regulates the non-banking financial services industry, which includes retirement funds, short-term and long-term insurance companies, funeral insurance, individual and collective investment schemes, including unit trusts and stock markets, and financial advisors and brokers.

What Does FSB Do?

FSB ensures that South African traders receive fair treatment from financial service providers. The agency has departments that oversee all facets of investing including consumer education, credit ratings and financial advisory services.

What Powers Does FSB Have?

  1. Developing legislation pertaining to capital markets and litigating disputes
  2. Investigating market abuse offenses
  3. Implementing market conduct regulatory and supervisory frameworks
  4. Protecting traders’ retirement funds from abuse

How Does FSB Protect Investors?

FSB investigates and enforces abusers who engage in insider trading, market manipulation and false reporting of information to the public. The agency also makes on-site visits to investment managers to investigate complaints and ensure compliance with laws.

Interesting Fact

The FSB enforcement committee has powers to impose unlimited penalties on abusers. Its orders have the equivalent weight of a ruling by the High Court of South Africa.

Reputation

FSB has an excellent reputation for tackling incidences of consumer abuse and financial malpractice.


International Financial Services Commission

The International Financial Services Commission (IFSC) is a financial regulatory agency in Belize that has oversight of financial market participants including exchanges. The IFSC sets and enforces rules for financial markets. Many online trading firms obtain licenses from IFSC.

Who Does IFSC Regulate?

The 1990 International Business Companies Act established the regulatory framework for Belize and seven subsequent measures expanded on this mandate. IFSC regulates corporations, trusts, financial services, insurance, protected cell companies, mutual funds, limited liability partnerships, retirement services and limited life companies.

What Does IFSC Do?

IFSC has a mandate to promote Belize as an international financial center, protect its reputation, provide supervisory and regulation of financial services, formulate policies to regulate those services and collect, store and disseminate reliable and timely information on changes to those services.

What Powers Does IFSC Have?

  1. Licensing international financial service providers
  2. Developing a statutory code of conduct for international financial service providers
  3. Ensuring compliance with internationally-accepted best practices

How Does IFSC Protect Investors?

IFSC helps enforce prohibitions against money laundering. The agency formulates policies related to financial services and advises the government on implementing those policies. However, IFSC largely relies on the industry to monitor its own actions and comply with laws and regulations.

Interesting Fact

Foreign companies in Belize pay no corporate tax on earnings abroad, which makes Belize a popular home to online brokers.

Reputation

IFSC is viewed as very friendly to trading firms, which largely self-regulate their compliance. This isn’t always in the best interests of you as a trader. If a broker is licensed solely by IFSC (i.e. not regulated in numerous jurisdictions as many of the most reputable brokers are) then it might be worth doing some additional due diligence.


National Futures Association

The National Futures Association (NFA) is an industry wide self-regulatory organization for the US derivatives industry. The agency, which began its operations in 1982, was authorized by the legislation that created the CFTC.

Who Does NFA Regulate?

NFA was designated by CFTC as a registered futures association. Membership in the SRO is mandatory and includes all commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers, major swap participants, retail foreign exchange dealers, swap dealers, exchanges and associates.

What Does NFA Do?

The Commodity Exchange Act (CEA) requires certain firms that conduct business in derivatives to register with the CFTC, and all CFTC members must join NFA. NFA identifies industry best practices and mandates them for its members.

What Powers Does NFA Have?

  1. Developing and enforcing rules for the derivatives industry
  2. Providing programs and services that protect market integrity
  3. Imposing disciplinary measures on members when appropriate
  4. Arbitrating disputes between member firms and customers

How Does NFA Protect Investors?

NFA offers traders resources to perform due diligence on investments. The association also educates its members about their regulatory responsibilities to customers.

Interesting Fact

NFA offers training to other self-regulatory organizations around the globe.

Reputation

NFA has a solid reputation. However, the collapses of Peregrine Financial Group and MF Global have led some to question whether they need to do more to protect customers’ funds.


Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is an independent US federal agency that proposes and enforces securities laws and regulates the securities industry. The agency was founded in 1934 and has a mission to protect traders; maintain fair, orderly and efficient markets; and help companies with raising capital.

Who Does SEC Regulate?

The SEC regulates the financial sector in the US through its five divisions:

  1. Corporation Finance – disclosures of public companies
  2. Trading and Markets – SROs such as FINRA
  3. Investment Management – investment companies such as mutual funds
  4. Enforcement – responsible for actions against alleged violators
  5. Economic and Risk Analysis – integrates data into SEC’s work

What Does SEC Do?

The SEC is an trader advocate. The agency protects traders, advocates for fairness in markets and disseminates information to market participants to help them make educated investment decisions.

What Powers Does SEC Have?

  1. Detecting, investigating and pursuing securities laws violations
  2. Reviewing company disclosures to ensure they are adequate
  3. Regulating the type and structure of investment products
  4. Regulating markets to ensure fair and orderly trading

How Does SEC Protect Investors?

The SEC serves as a watchdog for all market abuses including investment scams, insider trading, market manipulation and inadequate disclosures of risks on investment products. The SEC has authority to pursue civil, but not criminal, actions.

Interesting Fact

The SEC has five commissioners who are appointed by the President of the United States with advice and consent of the US Senate.

Reputation

The SEC reputation is mixed. The agency has enormous resources at its disposal. However, it is often criticized for its failure to police the largest US banks.


Markets in Financial Instruments Directive

The Markets in Financial Instruments Directive (MiFID) is an EU regulation designed to increase transparency across all member nations. The regulation was passed in 2004 and implemented in 2007. MiFID harmonizes securities laws across the 28 EU member states as well as Iceland, Liechtenstein and Norway. MiFID incorporate the concept of a passport, which means that firms that have regulatory approval to operate in one EU state can offer their services in the others as well. As a result of the 2008 global financial crisis, the EU made MiFID more expansive. These changes will go into effect in 2018

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