Forex Trading Regulations and Risks

By Kristy Naylor, LegitScript Legal Counsel

Online investing has seen a substantial increase in popularity and access due to new and emerging trading platforms that allow users to bypass traditional brokerages. With the rise in traffic to mainstream trading websites such as Robinhood and E*Trade, the number of platforms offering increasingly complex trading opportunities — and sometimes even facilitating fraud — is proliferating online, including on websites that accept credit cards.

One form of investing that has gained in popularity is foreign exchange trading. Although it has been a well-established practice for years, some versions of this trading have morphed into complex and often riskier offerings that payments companies should watch out for.

What Is Forex Trading?
Forex is shorthand for foreign exchange and is the global currency trading market (e.g., selling U.S. dollars and buying euros). Ordinary forex trading is not necessarily any more problematic than any other types of investing, though it can carry additional risk, and there is no centralized international market or exchange where all trading takes place.

While forex trading used to be reserved for banks, corporations, and other entities trading in high volume, the proliferation of internet trading platforms has allowed individuals known as retail investors (individuals who do not have a high net worth or significant experience trading in the market) to open accounts with relatively small amounts of money and engage in forex trading.

Forex trading is much more complicated than simply swapping U.S. dollars for Japanese yen, like a tourist might do at a bank while traveling. Most trading platforms permit customers to use what is known as leverage or margin trading, which allows customers to place a small amount of money down in order to control a large amount of currency. In the U.S., regulated forex trading permits a cap of 50:1 leverage; however, other countries permit up to 100:1 leverage, and some jurisdictions do not provide any cap on leverage whatsoever.

While this allows for greater profits when a trade is successful, it also means that losses are amplified. In some situations, investors on the wrong side of a trade may lose more money than is available in their account, eventually owing a debt to the trading platform. Platforms operating legally in regulated jurisdictions generally have to limit these losses, but those operating illegally, or in places where regulations are less robust, place no limit on potential losses and will take the opportunity to draw additional “owed” funds directly from customers’ credit cards.

Risks and Problematic Actors
In addition to the inherent risk in forex trading, governments have warned about fraudulent scams involving the forex market. U.S. regulators have identified a number of scams in which forex “dealers” simply steal money from investors outright and never actually place any trades. Additionally, some brokers have been found to artificially manipulate data on platforms to make certain investments more attractive to customers.

Although many of these trading platforms may not be fraudulent, some are engaging in unlicensed activity. The UK Financial Conduct Authority (FCA), maintains an active list of unauthorized firms and individuals, including many offering forex trading, with several new firms being added daily. Additionally, it is important for both potential customers and acquirers to know that in many jurisdictions forex trading is almost completely unregulated, so those who are victims of fraud or unscrupulous tactics may be completely without recourse in many cases.

Forex Example: Luxis Trade
Luxis Trade is a platform that, according to the U.K. Financial Conduct Authority (FCA), is engaged in unlicensed activity, which can increase the risk of customer exploitation. The FCA website states that consumers should be wary of dealing with Luxis and similar platforms that have not been vetted by the government: “Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised by us. However, some firms act without our authorisation and some knowingly run investment scams. This firm is not authorised by us and is targeting people in the UK. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.”

Payment service providers should always check to ensure that a forex trader is properly licensed in the jurisdictions where they operate. In an upcoming blog post, we’ll cover risks and warning signs to watch out for.

This post is part of the series Financial Trading Platforms: Regulations and Risks. This series offers a high-level overview of common and popular complex financial instruments — including forex trading, contracts for difference, and binary options — to help payments companies consider key points when onboarding these types of merchants. For more information, download the full guide.

Posts included in the series:
Part One: Forex Trading Regulations and Risks 
Part Two: Contracts for Difference Regulations and Risks 
Part Three: Binary Options Regulations and Risks 
Part Four: Financial Trading Platforms Risks and Warning Signs