The Unlicensed Broker: The Next Dinosaur?

In January of this year, FX Brokers all over the world got a wake-up call. The Financial Services Authority of Saint Vincent and the Grenadines issued an edict stating that all FX Brokers, registered in SVG, had to prove that they had a legitimate license to operate in the jurisdictions of their customers. If not, "please leave".

The debate still goes on about what the FSA of SVG will actually do about these unlicensed brokers or perhaps the whole thing was just a giant publicity stunt to draw attention to the island as a potential place for investment.

Reputational Damage

Regardless, there is NO debate as to WHY they did it.

Many FX Brokers chose SVG, among other locations, as a place to set up shop as it was a very inexpensive option. These countries issued no license as such but offered an exemption from having a license. The brokers and their banks, PSPs, tech providers, customers, etc., were comfortable with this arrangement.

Unfortunately, in the meantime, many scam brokerages popped up and saw SVG as a place to set up cheaply, get rich quickly, and get out even quicker. Of course, when duped customers lost their money and could not contact the brokerage, they complained loudly and publicly to the government of SVG and the agents who registered the companies in the first place. Many customer reviews, still visible on the internet, make it look like the island and its agents were responsible for the scams.

A small country like Saint Vincent and the Grenadines cannot afford this kind of reputational damage.

Many SVG brokers actually have applied for legitimate licenses. Many others tried to redomicile to other parts of the Caribbean and some were successful. However, some countries like St Kitts and Nevis blocked new registrations after just a few weeks.

Can we Rely on the Regulators?

For those of us who have spent any time in the business, we have seen similar cycles before. It doesn't seem that long ago that the Binary Options crowd sailed through our industry leaving a trail of destruction behind them. In this case, the regulators like the FCA, CySEC and ASIC, etc. purged these people from our lives.

This time around, however, it won't be the regulators who sort out the scammers. It will be the banks, PSPs, EMIs, and one insanely zealous platform provider.

In parallel with the FSA of SVG's edict, some financial institutions started blocking the accounts of unlicensed brokers. "No problem! Let's just find a new bank." Not so fast!

Our recent visit to the iFX Expo in Bangkok revealed quite a lot after informal chats in the trade show booths and networking events. There are, in fact, some financial institutions that will entertain unlicensed brokers, however, the conditions may be too onerous for some. At least one insisted that a broker's individual clients had to open wallets; some have sky-high transaction fees to mitigate the perceived risk; and still others have breathtakingly high account opening fees.

It's Becoming More Cost-effective to have a License than not!

Even very recently the costs and the time involved in getting a proper license were unattractive or out of reach to small and startup brokerages. In the last few months, however, that has all changed. It is now more economical to get a license as banking fees can easily outweigh licensing costs.

Some jurisdictions like Mauritius include a bank account in a small regional bank. Other jurisdictions like Labuan include a bank account in a major Asian bank with global reach. Obtaining a major license like FCA, CySEC or ASIC allows a broker incredible flexibility when it comes to almost every aspect of business.

For example, to collect funds directly from customers in Europe, a broker needs a be an approved "payment agent". This is now impossible without a license.

We at FYNXT are proud of our partnerships with Payment Service Providers and platform providers and we applaud their efforts to ensure that we only offer our services to legitimate businesses in the retail trading arena. It is highly likely that the unlicensed broker will go the way of the dinosaur by the end of 2024...or maybe sooner!