The Serious Stuff: Understanding The Legalities of the Forex Market


According to recorded statistics, the foreign exchange market saw an average daily turnover of $5.1 trillion in 2016 – thereby defining it as the world’s largest and most liquid financial market. As a result of its significant size and 24/5 accessibility, regulating this market presents unique challenges – after all, how do you go about supervising a digital market that’s open all around the world, 24 hours a day? As such, there is no centralised body that governs the currency trading market. Instead, it is regulated by numerous independent and governmental bodies all over the globe.

Because of this, for those entering the forex market as novice traders, understanding its individual rules and regulations isn’t always straightforward – often, the laws will differ depending on the country the individual is trading within. So, in this blog post, we’ll take you through all you need to know before starting on your currency trading venture – exploring the various stipulations surrounding this sometimes volatile market to ensure you’re safely in the know both before you open your account and throughout your trading career.

Forex market regulation

As aforementioned, due to the global scale of the currency market, there is no international organisation that is able to regularly and effectively monitor forex trading – instead, different countries have separate authorities set up to protect traders on a more local scale.

In the UK, the main financial regulatory body is the consumer watchdog agency, the Financial Conduct Authority (FCA), which is funded by all the companies that supply financial services in the UK – including forex brokers. As part of their role, the FCA is tasked with regulating and licensing UK entities and works closely with the Bank of England to ensure that all forex brokers are actively promoting and creating a healthy trading environment in which they act in the best interests of traders.

Other national supervisory bodies created to control and regulate trading in the FX market include, but are by no means limited to, the following:

  • Autorité des Marchés Financiers (AMF) in France
  • Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany
  • Comisión Nacional de Mercado de Valores (CNMV) in Spain
  • Financial Conduct Authority (FCA) in the UK
  • European Securities and Markets Authority (ESMA) for the European Union
  • Securities and Exchange Commission (SEC) and the National Futures Association (NFA) in the USA
  • Australian Securities & Investments Commission (ASIC) in Australia
  • The Financial Services Agency (FSA) in Japan
  • The Securities and Futures Commission (SFC) in Hong Kong


Forex broker regulations

Due to their authority in all UK financial markets, the FCA takes complete responsibility for safeguarding customers from immoral and, at times, corrupt forex brokers. As a result, all those brokers defined as being regulated in the UK have been named so with the seal of approval by the FCA and are obligated to follow their guidelines because of this. If they don’t provide evidence that they are doing so, the FCA has the right to revoke their license and impose disciplinary measures against the company in question.

For new traders entering the currency market for the first time, therefore, it’s crucial that you choose a licensed broker that has been approved by the FCA, as opposed to offshore, unregulated forex brokers. This will ensure your money is protected in the event of liquidation, fraud or bankruptcy. When searching for a regulated broker, be sure to check the company’s regulatory status in the Financial Services Register, here.


Advantages of trading in a regulated market

Forex brokers regulated by the FCA offer currency traders peace of mind that their capital is protected on their platform, due to licensed brokers having to regularly provide evidence to the regulatory body to show that client funds and company funds remain segregated at all times. In addition to this, the FCA ensure that caps on leverage are implemented to limit a trader’s potential loss if markets happen to suddenly move in the wrong direction.

In addition to the above, in an instance where you need to close your account and transfer your funds, licensed brokers are sure to offer a straightforward service and will happily help you ensure your funds are securely transferred. What’s more, in the event of a problem, you will be protected and compensated by the official governing body for up to £50,000, courtesy of the Financial Services Compensation Scheme (FSCS) – allowing you to rest assured that your investments are safe.



Financial laws surrounding forex taxation

For new forex traders in particular, the general hype surrounding the potential for uncapped profitability and success can allow them to bypass the ‘legal stuff’ – namely what their new endeavor as a forex trader means for their tax implications. In the UK, when opening your new account with a regulated forex broker, any profits you make will be analysed in three categories, dependent upon the amount of profit you earn – they are as follows:

  • Self-employed trader – for those classed as self-employed traders, you will be taxed as any other self-employed person liable to pay business taxes – for more information, see the UK government’s self-employment guidelines here
  • Private investor – in the case where you’re decided by the HMRC as being a private investor, your profits and losses will be taxed against the capital gains tax regime
  • Speculative – because there is no asset that is actually owned, many forex traders fall under this tax bracket and, as such, dodge capital gains tax due to profits from forex (as well as spread betting and CFDs) being classified by the UK government as tax-free until the threshold has been surpassed. At present, in the tax year 2019 – 2020 the capital gains tax allowance is £12,000 – meaning that you can make a profit from an asset of up to this amount before any tax is payable
How to ensure you’re taxed correctly

Naturally, even once you feel that you’ve done an ample amount of research, due to the speculative nature of taxation regulations for forex traders, you must always tread with care before beginning a career on the currency market. Most importantly, you need to act sensibly and follow these two main tips to ensure you’re taxed correctly and legally:

  1. Seek proper advice – no matter how much capital you invest in forex, you must ask yourself, is it really worth risking it all over a silly, avoidable error? The answer, we’re sure you’ll agree, is no. So, if you’re still unsure about which tax bracket you fall under, contact the HMRC directly and seek clarification, where an advisor trained in day trader taxation will point you in the right direction to ensure you don’t fork our sizeable sums later down the line.
  2. Record everything – depending on your trading activity during the financial year, the bracket you fall under will vary between ‘speculative’, ‘investing’ and ‘self-employed’ activity – as a result, it’s crucial that you record your trading activity throughout the year including; purchase and sale dates, entry and exit points, instruments and prices. With this information easily accessible to you, you’ll be sure to save yourself hours of headaches when it comes to filing your tax return at the end of the year.


How to spot a forex scam

Unfortunately, given the scale of the market and without a sole international regulatory body, forex scams are more common than you might initially think. However, while in recent years the older, popular scams have ceased, there are many scams that continue to exist – with new ones popping up regularly.

In order to avoid falling for a scam that has the ability to empty your account, it’s important that you know how to identify the following warning signs:

  • No live track record – before choosing a forex broker, ensure they have evidence of verified statistics from active trading accounts. If this is a problem, or if they only have data recorded from demo accounts, you have reason to be wary
  • Not regulated by a national governing body – first and foremost, before you even consider selecting a forex broker you need to check their reputability and status with your national financial governing body. In the UK, for example, you are also able to check specific brokers against the FCA’s warning list, and it goes without saying that if you find your prospective broker on this list, you should avoid using them
  • Pressure to deposit your funds – an authorised, regulated broker would ensure you felt comfortable with them before transferring over any of your capital. As such, if you find that a broker is pressuring you to deposit your money upon early conversations with them, it’s highly likely they’re trying to scam you

If you’ve already been scammed, it’s of paramount importance that you report said scam to the appropriate governing body. For UK traders, you should report it to the FCA here.

As with any new independent business venture, forex trading isn’t an easy road to success – on the contrary, it requires a trader to invest a large amount of time, patience and thorough research before opening their first position. To help you start your trading journey the right way, equipped with all the necessary know-how on how to trade safely, find out more about our expert-led, award-winning free forex workshops.