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The introduction of ESMA regulations back in August 2018 has had a big impact on traders looking to trade with CFDs and Spread Betting. Making large trades using leverage provided by the brokers is now inaccessible to all but the most experienced of retail traders.

While we here at The Armchair Trader welcomed the introduction of ESMA regulations, having witnessed for ourselves the large percentage of traders that lose their money, we have seen over recent months that there is an increasing number of Europeans that are looking at offshore trading accounts in order to bypass the ESMA regulations.

Now, European brokers are not allowed under the new regulations to transfer traders to their offshore businesses but the rules do not currently apply for Europeans traders approaching an offshore broker.

This means that traders wishing to magnify their trades with higher levels of leverage can now do so at their own risk.

However, there is an issue for European traders wishing to open a CFD account with an offshore broker. They need to find one that can be trusted to keep their money safe. Too often we hear stories about traders losing money with unregulated offshore brokers with little to zero comeback.

With a problem to address and ever willing to help, The Armchair Trader team spent some time researching offshore brokers. What we found was the Financial Commission – a non-domicilled offshore regulator.

What is the Financial Commission?

Well, the Financial Commission was founded in 2013 as an independent self-regulatory organization and external dispute resolution (EDR) body. The regulator aims to protect and educate Forex, CFD and digital asset traders and investors while ensuring that traders and brokers resolve disputes in a fast, efficient, unbiased and authentic manner.

We spoke with Nikolai Isayev, COO of the Financial Commission to find out a little more about them.

The Armchair Trader: Can you tell us how the Financial Commission works?

Nikolai Isayev: When a broker joins the Financial Commission, they are demonstrating their commitment to upholding the highest standards and best business practices in conducting their business, regardless of their licenses and locations. These activities come together to create a cleaner, more credible Forex and digital currency environment overall.

Disputes at the Financial Commission are handled by the Dispute Resolution Committee (DRC), a group of independent industry experts who volunteer their time to review complaints information and provide feedback and judgements on trading related, financial and other types of disputes. DRC experts are not provided with the customer or brokerage’s details, so that the complaint resolution can stay unbiased, impartial and independent.

Since 2013, the Financial Commission has grown significantly and now processes over 900 complaints annually.

AT: What is the qualifying criteria for a broker to join?

Nikolai Isayev: The Financial Commission requires that all offshore trading brokers applying for membership submit corporate documents and information for review, as well as a supplementary questionnaire to analyze the broker’s operation with their customers. Moreover, brokers who have been in business less than 3 years are required to submit two professional references from a shareholder, director, senior executive or comparable officer of a Financial Services firm or firms that have been in operation for more than 3 years.

The Financial Commission’s Board of Directors reviews the member application, corporate documentation, answers to the questionnaire and other relevant information before making its decision. The Commission has the right to reject an applicant based on its assessment of all information provided during the application process.

AT: How do you enforce your regulations?

Nikolai Isayev: Financial Commission member firms understand that they must adhere to the Rules & Guidelines of the organization that outline general business standards that brokers must follow, as well as the rules and processes governing dispute resolution.

Member firms can be expelled from the organization if they breach the membership agreement, fail to adhere to the Rules & Guidelines or refuse to honor an award of judgement issued by the DRC in favour of a customer. In such cases the organization issues and distributes notices to the public to advise them of the failure to adhere to the organizations’ code of conduct.

AT: What kind of sanctions can brokers expect for breaking regulations/mistreating customers?

Nikolai Isayev: Following a decision to expel a member from the Board of Directors, the organization notifies its Members, partners and the public about the expulsion of a firm if it breaches the membership agreement or fails to adhere to the Rules & Guidelines of the organization. Such notices often negatively affect the credibility and trust in a brokerage from the customer’s perspective.

Likewise, in extreme cases, the Board of Directors may decide to put a former member of the organization on the Commission’s Warning List. This happens very rarely and only when egregious and possibly fraudulent conduct by a brokerage is suspected and confirmed by customers and the organization to have taken place.

Is there a point where a broker can be struck off from the Financial Commission?

Nikolai Isayev: Here is an example of a broker who did not honour the DRC’s decision on a complaint (to compensate the customer) and was subsequently expelled with the Compensation Fund used to compensate the customer:

Here is an example of a former member being put on a Warning List after numerous customers confirmed that the broker stopped withdrawing customer funds and used misleading statements to delay such payments following its withdrawal from membership in the Financial Commission:

A full list of firms that have been expelled is located here in our Members section.

AT: What is the complaints process for traders?

Nikolai Isayev: First, traders must understand that in order for the Commission to accept the complaint their broker must a) be a member of the organization and b) must try and resolve the dispute directly with the customer first.  We give members 14 days to try and resolve the issue directly with the customer.

If the parties cannot come to an agreement, the trader files a dispute on the Commission’s official website.

The dispute resolution process is outlined on the official website of the organization. It is important to note that during the Investigation phase the DRC will look to see if there is an opportunity to settle the dispute using the information already provided by the parties. By looking at the possibility of a compromise this stage, the DRC greatly improves the efficiency of the resolution process and helps to keep the average resolution time short, as compared to other regulatory affiliated resolution mechanisms (Financial Ombudsman Service UK, etc.)

Traders who find that the dispute resolution was in favour of the broker are free to pursue other avenues to resolve their situation, including legal action. In such instances, the decision issued to the customer by the DRC can be used as a resolution from an independent 3rd-party mediator.

AT: Do you have any advice for traders looking to use an offshore broker?

Nikolai Isayev: : There are quite a few ways that traders can evaluate the safety, reliability and service of offshore brokers. Traders can check the brokerage firm’s registration to determine if an offshore regulator exists, possibly offering a dispute resolution service. Likewise, traders should carefully study the brokerage’s Terms and Conditions to understand the policies on trading and withdrawing or depositing funds. Lastly, traders can rely on public comments and reviews to determine what other customers have experienced.

The Financial Commission has an online tool called ‘Check Your Broker’ that provides a fast and easy to use way to find information on offshore and licensed brokerages and determine which are Members of the organization.

AT: How many brokers do you currently have on board?

Nikolai Isayev: We currently have 24 broker members. Since 2013, over 40 firms have joined the Financial Commission as members at one point or another.

AT: Is that number set to grow?

Nikolai Isayev: Yes, we expect the number of members to grow for several reasons. On the one hand, we see that ongoing regional regulatory changes are making Forex trading more restrictive and as such, traders and brokerages are moving to offshore jurisdictions to continue to enjoy the same leverage and other trading conditions. To continue to provide protections or access to mediation for customers, such offshore brokers take an interest in the Financial Commission.

On the other hand, we know that existing dispute resolution mechanisms in US, UK and Australia are not always efficient for a variety of reasons. For this reason the Financial Commission also began offering its services for onshore, regulated brokers in early 2019.

The Armchair Trader says:

While offshore trading is clearly an attractive prospect for retail CFD traders, The Armchair Trader would urge caution with an offshore trading account. The ESMA regulations were set in place to protect traders from the significant risk associated with Contracts for Difference. However, should you decide that an offshore trading account is right for you, we suggest you follow the advice above and ensure that your money is as well protected as possible.

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Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

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