Short of some elaborate fraud (and there are some I shall describe that are just plain crafty), it is rather difficult to simply ‘lose’ your money when dealing with a foreign currency company.
Having said that, one shouldn’t be nonchalant.
Any FX firm you inquire with will do their due diligence on you. Why not do you due diligence on them?
We appreciate that you may consider life too short and you may very well have had a concrete recommendation to use our firm, bully for you, but, you should at the very least avail yourself of an understanding of the risks facing an FX firm so that, if the world should turn on it’s head and your firm isn’t around anymore, you can say you were aware of this risk rather than having to admit that you did nothing to question or assert their probity.
Every money service business in the UK is regulated by the FCA. They must also have a license from HMRC and you can look for them on the FCA register.
By money service business (MSB) we mean companies who actually physically receive money from their clients into their own segregated accounts.
It is worth noting that brokers like Prime Cap are not MSBs; we appoint an FCA regulated business to receive and hold client funds for us. This gives us greater flexibility but also means that our clients have the benefit of the security that a far bigger player in the non-bank currency sector can provide.
We do our research and vet the institutions we use. We prioritise a secure balance sheet, UK mainland accounts and a global payments infrastructure.
Using a regulated third party gives us access to a global financial network and means we can reduce our costs, which feeds directly into improved margins for our clients.
Perhaps not surprisingly, money service businesses (MSBs) are the common focus for those wishing to launder money, but rather less those looking to defraud customers of it.
This is because of the rigorous reporting and customer due diligence protection in place.
There are a huge variety of money service businesses. These can range from bureau de change companies with a high street presence into which you can walk and electronically send money home, right up to the enormous FX brands who support and execute trading for the likes of the Post Office and the Telegraph (who offer a branded currency service), but use an MSB for their back office functions.
Frustratingly for the industry itself little distinction is made between a smaller entity and a larger one and some of the regulated institutions relied upon to service, bank-roll and support the retail deliverable FX industry treat the sector as a whole rather than acknowledging there are a large number of compliant and diligent businesses.
Whilst regulation of the FX sector may ensure that companies have particular practices with regards to the segregation and protection of client money and comply with customer due diligence (CDD) guidelines as a means for detecting and protecting against being used to launder funds and other elicit activities, there is little that the regulator can do to enforce operating practices on a business necessarily - spot checks, yes; but, making sure the company does right by their client...not so much.
It is reasonable to infer that, provided a customer meets the regulatory requirements, they can become a client of an FX firm. Whether or not that client has the scruples one would like to think they do is for the FX firm to work out.
By this we mean, as with our posts about what to do if you need to cancel a currency contract, if as a broker one feels that one’s customer might have an issue in paying for a contract, doesn’t understand what is expected of them and/or cannot be relied upon to meet the terms and the conditions of a contract, then the broker has to act.
The regulator is not going to be there as the filter for the business. The best protection for the business and its other clients is competent, vigilant and diligent staff who are motivated to protect the integrity of their portfolio and the operation of the business.
As an example, we were recently engaged by an interior design studio to make a payment to one of their suppliers. Like many interiors firms (and, dare I say it, their businesses make up the bulk of our corporate portfolio) this client relies on the ‘go-ahead’ from their customer before placing an order.
We quoted the client (the interior designer) and they accepted our price…however, we had not made it clear enough that when we get 'the go ahead' we actually physically buy the currency they request through our underlying FX provider.
The design firm hadn’t take this into account.
They thought they were saying ‘OK, I like that rate’. It was only when they checked with their client and it was decided they did not want to buy the piece that it became clear to us of the miscommunication.
An extrapolation of the above example might lead one to ask…’well, what happens if every client of a foreign exchange firm decided they didn’t want to pay?’. This is the question and, frankly, the single greatest risk to the continued operation of the FX firm.
If we sell ‘x’ amount of currency and someone does not pay for it, we are on the hook to meet the difference between what we have sold and what we have bought.
In theory no firm should struggle to do this because they have put away sufficient allowance to cover any such loss - and, in instances like this Prime Cap are not at risk because of the liquidity of the provider with which we work.
On a slightly tangential but no less relevant note, hackers are coming up with more elaborate ways of getting to your funds - not through the institutions that hold them, but through your own personal password protected platforms. Fortunately firms are responding by tightening their verification practices.
Have you heard about the spread betting company that received an email from a client asking the company to transmit the customer’s entire balance (funds on account) to a new beneficiary? So convincing was the email received that the employee who received it could not identify the fact that it was fraudulent. The money was sent, following receipt of this instruction, to a bank account in central Africa. Funds were withdrawn and the account closed.
This fraud required sufficient confidence on the part of the fraudster. They needed to be confident they could mimic the dialogue of the victim. As it happened the regulator found that it was actually incumbent upon the stock broking firm receiving the request to verify from whom the email instruction was sent.