Can you expect a notable difference between a broker regulated by CySEC and the FCA? Both organizations are among the leading forex broker regulators with similar objectives of maintaining the legal framework for the industry. There are some subtle differences that traders should note.

Quoting the words of the current JPMorgan Chase CEO, Jamie Dimon, good regulation should be conducive to business and consumer protection. Regulators in forex attempt to achieve that objective.

The most well-known forex regulators are CySEC and the FCA. This article will cover the differences between both regulators that could help us understand the kind of services that we should expect from a CySec-regulated broker and an FCA-regulated broker.

What is CySec?

CySEC

CySEC, an abbreviation for Cyprus Securities and Exchange Commission, is Cyprus’ principal financial regulatory agency. Established in 2001, Cyprus became a member of the EU (European Union) three years later, enabling them access to all the EU markets. 

Inclusion into this union meant that CySEC complies with Europe’s MiFID (Markets in Financial Instruments Directive). The MiFID provides a ‘harmonized’ legal framework for securities markets in the EU.

Among several other objectives, CySEC’s main ones related to forex are providing operation licenses to brokers and being a watchdog for them. Despite the small size of Cyprus, CySEC is one of the largest government-owned forex regulatory agencies globally, with at least 200 brokers under their watch.

What is the FCA?

FCA

The Financial Conduct Authority (FCA), a non-profit organization, is the United Kingdom’s foremost financial services regulator. Like many financial watchdogs, some of the FCA’s main responsibilities are overseeing the conduct of brokers and maintaining the integrity & conduct of forex markets in the jurisdictions it represents.

The FCA as we know it today began in 2013 from the ashes of the Financial Services Authority (which itself started in 2001). Unlike its counterpart, the FCA is not government-owned, although they oversee many more countries than CySEC. This broad coverage gives them greater power, resulting in a high reputation amongst forex participants.

Differences

There are certain differences distinguishing the FCA from CySEC, which concern the three major points below.

Rules

The FCA has a few more stringent rules in place, a stark contrast to CySEC, which is somewhat laxer. In early 2018, ESMA (European Securities and Market Authority) passed a few laws which have had a significant impact on traders ever since. 

Some of the main rules the ESMA imposed required FCA-regulated brokers to reduce the leverage they offered to clients severely. The second major law was that FCA-regulated brokers have to provide risk warnings on their website content where they state the actual percentage of clients that lose money over a defined period.

Although some of these rules have become less strict, there is a noticeable difference between brokers policed by each regulator. Generally, brokers who are primarily overseen by CySEC provide higher leverage than those by the FCA. 

One also sees that brokers with more of a UK presence and supervised by the FCA will have the risk warning on much of their web content, something that is rarely seen with CySEC brokers.

Segregated accounts

This point may not be so substantial unless a broker has regulation from only one of these regulators. A segregated account is a company account that separates the funds deposited by clients from their own. 

This feature ensures that in the unlikely event where a broker goes bankrupt, they can compensate traders for their deposits. One of FCA’s requirements is for brokers to have segregated accounts, which is an expensive process. 

However, there is more trust given by clients when brokers have this feature. On the other hand, CySEC brokers are not necessarily required to own segregated accounts.

Bonus offers and promotions

This section is very similar to the rules since the 2018 ESMA interventions. We should note that although both CySEC and the FCA regulate countless brokers, often a firm will lean more towards the policies for the regions (either the UK or EU) where they have a stronger footprint.

Part of the ESMA interventions restricted the offering of bonus offers and promotions from brokers. Many brokers, primarily overseen by the FCA, rarely offer bonuses or promotions to new clients like no deposit or first-time deposit offers. 

However, brokers chiefly monitored by CySEC often have several of these offers. Some of the bonuses and promotions have been frowned upon by trading communities due to their unreasonable withdrawal requirements.

The Brexit effect

Brexit may undoubtedly have ramifications for brokers licensed by CySEC, and more so the FCA. Concerns are rife the European Union may forbid their citizens to trade with a UK-regulated broker.

Presently (at the time of writing), FCA-regulated brokers are free to operate across the EU, though this could change depending on negotiations between the UK and EU member states. 

We should know what will happen after the 31st of December 2020 when the ‘transition period’ is over. CySEC brokers may also be affected since the EU could mandate them not to serve UK clients. 

Does it matter?

The forex industry has seen an increase of forex brokers supervised by the large Cypriot watchdog. This upsurge is attributable to the fact that financial fees incurred by a CySEC-licensed broker are significantly lower than an FCA-licensed one. 

However, the industry perceives the FCA’s standards as stricter than those from CySEC, as evidenced by previous discussions. Consequently, investors see the FCA in a better light. However, it may be more objective to consider any illegal or unfair practice on a broker-by-broker basis rather than on the perceived reputation of a specific regulator. 

Fortunately, tens of brokers nowadays have the luxury licenses obtained from both institutions. Traders should ideally look for brokers with multiple licenses. There are now very few recognized brokers who only have one license, let alone solely from either CySEC or the FCA.

Conclusion

Very few differences exist between CySEC-regulated and FCA-regulated brokers. However, once the Brexit transition has finished, much could change. Nonetheless, to summarise, these may be the notable variances between each regulator:

  • Clients can expect higher leverage offerings from CySEC-regulated brokers than those regulated by the FCA.
  • They can also expect more bonuses and promotions by brokers supervised by CySEC than the FCA.
  • All brokers primarily monitored by the FCA or who have a more UK-based presence will show the risk warning of how many clients lose money over a defined period. Rarely is this information displayed with CySEC brokers.
  • Segregated accounts are a must for FCA brokers, while they are not with CySEC brokers.
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