Unregulated Offshore Brokers

Chris Lee

The forex markets are completely swamped. The market is extremely liquid, with over $5tn traded daily, and there are so many forex brokers out there that it can be hard to discern the good from the bad. One particularly common problem in the forex industry is that of unregulated and/or offshore brokers.

Unregulated forex brokers aren’t always wholly dishonest. However, the risks associated with working with them can easily become disastrous. There are many scams in the forex world, which means dealing with an unregulated broker can be like playing with fire. In the case of fraud, you have little, if any, recourse.

Every business sphere, especially in the financial services industry, has regulations put in place for a reason. Forex brokers are expected to follow strict rules to continue operating legally. But many people complain that regulations can be costly and overbearing, especially for those who trade forex professionally. This may be true in many cases, but is going unregulated ever worth the risk?

What are the differences between regulated & unregulated brokers?

Regulated forex brokers are expected to follow strict regulations to ensure the market remains fair. When an onshore, regulated broker breaks the rules and does wrong by their clients, they are subjected to various penalties. 

When regulated forex brokers are accused of breaking the rules, they have enquiries launched against them. In the case of mild infractions, they are forced to pay fines deemed appropriate for the exact violation they’re guilty of committing. If repeatedly breaking the rules, or breaking serious rules and then get caught, they face more severe consequences, such as the revocation of their licences. Legitimate forex brokers sometimes commit more extreme and damaging offences. When they do, they can potentially face lawsuits, in some cases leading to criminal charges.

It’s important to note that, in any case, a forex broker’s clients have a channel to resort to when they are victimised. Not every regulated forex broker is honest. There are plenty of rip-offs and underhanded methods in the legal forex industry. However, from the client’s point of view, there is always some form of recourse available. Even in the case of a disaster, there is always something the customer can do to protect their rights and their assets if they have been seriously wronged. But this isn’t the case when it comes to the unregulated, offshore brokers.

Unregulated forex brokers can function honestly and may appear to be very similar to regulated brokers. However, their honesty isn’t a requirement, it’s just a choice they make. The real difference is that they aren’t obliged to be honest and follow the rules or any particular code of ethics. While you can still strike gold with unregulated brokers, you must keep in mind that they don’t answer to any authorities and you have less security from malpractice when trading through them. Granted, they have the freedom to offer you services that regulated brokers can’t, but they also have the freedom to do whatever they want to you.

Of course, unregulated brokers are still businesses. They must offer something rewarding for customers, otherwise they won’t be able to grow. All the same, quite a few horror stories frequently result from these brokers’ abuses.

Common issues

One of the most common complaints targeted at unregulated forex brokers is that they hit their own stop-loss targets when other brokers claim the target was not reached. This can be disastrous. Stop-loss targets, as the name suggests, are a safety measure put in place to protect you from excessive losses. This is simply unacceptable from a professional trader’s point of view.

Another less common but far more egregious complaint is that unethical, unregulated brokers move their own currency prices so that the loss limit is reached. They do this even when the market prices may not have fluctuated to that extent. These actions can certainly be described as fraud, but your recourse options are too limited to be worth consideration.

In all, there are so many scams that unregulated brokers can engage in without repercussions. Signal-selling scams and several scams involving robots are incredibly common today. Some scams have become outdated thanks to new technology, but they’ve just been replaced by new ones. In the end, unregulated forex brokers may offer some benefits over mainstream ones, but they can be extremely risky, even when you’re careful.

Greater leverage

At this point, you may be wondering why so many people prefer unregulated forex brokers. Despite the inherent risks of dealing with unregulated forex brokers, they do have their advantages. One of the benefits that unregulated brokers bring to the table is a greater capacity for leveraged trading.

In forex, leverage is the ratio of a trader’s funds against the broker’s credit. Essentially, leverage is borrowed credit that can help you increase your returns. Of course, the opposite is true as well — higher leverage also represents greater risk for the trader.

Because of the inherent risk in leveraged forex trading, there are rules that brokers must follow. In the US, for example, leverage is limited to a 1:50 ratio. This rule helps ensure that inexperienced traders don’t experience obscene losses. However, some trading veterans don’t appreciate many of these rules and regulations and see them as an obstacle to greater profits. This is where the offshore, unregulated brokers come to save the day.

With some unregulated forex brokers, you will find a ratio that is many times higher than the US limit. In some cases, the ratio can be 1:400, or much higher. These ratios give traders far more freedom to risk their funds for much larger returns. 

The advantages of unregulated, leveraged forex trading are rather simple. Do the maths and you’ll see that an unregulated broker (that doesn’t scam you) will make you a lot of money if you play your cards right. On the other hand, they can also land you in far more debt than regulated brokers would. 

Dealing with unregulated brokers: what are your rights?

So, we know that unregulated brokers carry many risks. Despite that, a quick search online will give you access to so many of these brokers. Why is that?

Unregulated, unlicensed brokers are very common and they are by no means illegal. The main thing you stand to lose if you deal with them is your access to recourse. Regulated brokers are not guaranteed to treat you well, but they are guaranteed legal scrutiny if they break the rules. A regulated forex broker must, in the very least follow regulations.

Regulated forex brokers go through regular audits. They are subject to the financial regulations of their home countries. They must submit timely reports and meet stringent operational requirements.

If you use an unregulated broker, you’re dealing with an organisation in the dark. There is no one monitoring them to make sure they don’t steal from you — so, if they do wrong by you, there is almost nothing you can do about it. This is why you will find entire lists of unregulated forex brokers if you do a quick search, as a warning and guidance.

In the end, you have no real rights if you deal with an unregulated broker. You may use their services if you wish, but you do so at your own risk. If anything goes wrong, there is nothing you can do about it.

Why are some offshore brokers unregulated?

The market generally finds a way to supply any demand. Regulated forex brokers can meet most if not all of your forex trading needs. However, if you find that they don’t cut it, then an unregulated broker becomes a new source for the services you’re looking for. 

Unregulated brokers offer traders more freedom and flexibility in their trading than their regulated counterparts. There is the issue of leveraged trading, but they typically offer you more freedom all around. They generally provide little that can be of benefit to a rookie forex trader — however, more experienced traders who are confident in what they do often find this freedom appealing.

Another very common reason for some offshore, unregulated forex brokers is the avoidance of taxation. Offshore brokers don’t have as many expenses as the normal, regulated ones. This allows them to save a lot of money on operational costs. Most of these offshore brokers are in fact in offshore tax havens.

On top of a limited tax burden, offshore brokers don’t need to worry about licencing and compliance. Getting a forex broker’s licence costs a lot of money and this can prove to be a bar of entry that makes it hard for would-be brokerages to get into the business. The combined effects of avoiding taxes and avoiding regulatory responsibilities make it much easier for offshore brokers to get into and remain in business.

Also, offshore, unlicensed, unregulated brokers can offer services that others cannot. Higher limits, leveraging, and other services can be offered by these brokers. This can make them more appealing to forex traders that want to take advantage of resources they normally could not.

Lastly, there are some truly despicable offshore brokers. For them, having an unregulated, offshore forex brokerage allows them to cheat you in ways a regulated brokerage could not. Full-time criminals would typically launch their business offshore as they need to be beyond the reach of regulators and other authorities to continue their scam. Going offshore grants these unscrupulous ‘brokers’ the ability to scam customers to their hearts’ content.

Why would you use an unregulated offshore broker? 

If you’re just getting into forex trading, it’s most likely that you do not have a good reason to use offshore brokers. Once you know a thing or two about trading, however, there are several benefits to going offshore.

Using an unregulated broker is often cheaper. This is again because of the lower start-up and operational costs involved. Regulated brokers tend to pass these costs down to the client. They may do this in one of several ways, but it usually starts with larger commissions.

Unregulated brokers also offer far more leverage in trading. This is by far the most valuable thing that an unregulated broker has to offer. While regulations are put in place for good reasons, frustrated trading veterans can understandably find limits frustrating.

In the end, unregulated brokers are often better for the freedom they offer. However, at the same, we highly recommend you avoid them due to the astronomically higher risks they bring.

How to avoid unregulated brokers

Figuring out which brokers are regulated is critical in ensuring that you don’t get ripped off. One good way to start is to look for resources that warn traders of unregulated or offshore brokers. In any case, before you hop aboard with a new broker, you need to ask yourself a few questions:

· Is this broker regulated?

· What regulatory body is it monitored by?

· Is the broker offering extra incentives (gifts) for opening an account?

· Is the broker offering guaranteed profits?

· Is the broker promising success through automated trades?

· Is there credible information proving that this broker is legitimate?

· Is its offer too good to be true?

That’s a lot to go over, but these questions must be answered. 

First of all, if a broker is doesn’t report to a specific, credible regulatory body, steer clear. Legitimate brokers will advertise their legitimacy by posting the regulators they answer to on their website. Once you find the regulator on the broker’s site, go to the regulator’s site and double-check. If you have any reservations, contact the regulatory body to confirm the broker’s authenticity.

When you see potential brokers offering strong incentives for signing up, be careful. If the broker offers you ridiculous profits with near-100% guarantees, then take caution. The same can be said for cash bonuses for signing up. Legitimate businesses don’t need these to maintain a healthy, profitable company. If it sounds too good to be true, it likely is.

Legitimate forex brokers also tend to make their information easy to find. Look for the company’s headquarters and confirm that it’s a legitimate address. Criminals don’t like to have legitimate, publicly available information, especially an address where you or the police can just walk in.

In general, be careful and avoid unregulated brokers. While some people may claim that “unregulated is the way to go”, you stand to lose a lot of money if you fall for them. Stay safe, not sorry!