Establishing a Brokerage House — Licenses and Regulation

For entrepreneurs, opportunities come and go quickly in the current financial world, so the first to notice current or future events are more likely to have the upper hand. However, precise predictions aren’t enough: An entrepreneur looking to establish a brokerage firm has to be knowledgeable in this field and know how to manage such a business well. In a former article, I discussed the basic essentials of establishing a brokerage firm. This time, I would like to dive deeper into licensing and regulation.

A brokerage license allows you to offer online trading services in the regulatory body’s jurisdiction with a “tried and true” stamp. This means that first, you need to decide which target audience you want to address, and only then act on the regulatory aspect. Choosing a regulator can help you better understand your goals: Which type of customers are you targeting? What services do you wish to offer? How much capital do you need?

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A brokerage license — for and against

Note that it’s not necessary for a CFD brokerage firm to run with a regulatory license. Some CFD brands indeed choose not to be regulated. Whether you wish your brand to be regulated or not, there are some benefits and consequences that you need to familiarize yourself with beforehand.

These are the pros of being a licensed brokerage firm:

• Credibility — A regulated business is more appealing to many customers looking for assurance that your brand complies with the law and is committed to ethical business practices.
• Higher exposure to financial support — A brokerage license can provide a continuous flow of funds, leading to further business development.
• Attractiveness — A regulatory license encourages a business to be reliable at all costs. Credibility builds trust. Once complete trust is established with its customers, it’s more likely that a business will further benefit from significant investments from outsiders.

Have a look also at the cons of being licensed:

• Harsh financial obligations — Operating under a license has certain costs. I will discuss these later in this article.
• Continuous supervision — Once you’ve obtained a license, expect frequent visits from your regulator in order to ensure that your conduct is compliant with regulations.
• Marketing activities restrictions — Having a regulatory license can limit flexibility in your marketing efforts and impact how you promote your products and services online.

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Brokerage licensing in Europe — CySEC

The Cyprus Securities and Exchange Commission (CySEC) is the regulatory body for the financial industry in Cyprus. Since Cyprus became an EU member, companies registered in CySEC can gain access to the rest of the European market. Most companies under CySEC provide access to online trading of financial products with Contracts For Difference (CFDs) through two types of brokers:

• STP (Straight Through Processing) brokers send all orders to the market.
• MM (Market Makers) brokers provide bids and offer quotes for specific financial instruments. These can be viewed and traded by individual clients on the broker’s online platform. MM brokers may hold some or all market risks that arise from client orders.

CySEC demands that brokers set into place — or otherwise outsource — the following departments and functions to receive its license and access to the rest of the European markets.

• The firm must be established in Cyrpus and have local offices.
• The firm must have at least two executive and two non-executive directors. The management team must include two senior managers (CEO & COO/Managing Director).
• The firm must have a trading room for receiving and transmitting customer orders and executing orders.
• The firm should have a portfolio management department and an investment advisory department (if applicable).
• The firm must have a back office for maintaining client files, a finance and accounting department, and a customer service department.
• The firm must have an IT department to protect the company’s data, network, servers, and personal computers.
• The firm must have a risk manager for identifying and assessing risks, plus designing and implementing risk strategies or procedures.
• The firm must have a compliance officer responsible for ensuring the firm lives up to the CIF (Cost, Insurance, and Freight shipping agreement) demands.
• The firm must have an internal inspector responsible for ensuring that the operations manual is updated — regarding internal processes and procedures and external legal obligations.
• The firm must have an anti-money laundering compliance officer.

Other types of major brokerage licenses

• ASIC — Australia
• FCA Canada — Canada
• DFSA — UAE
• SFC — Hong Kong
• MAS — Singapore
• FCA UK — the UK

Many brokers wish to be licensed by the FCA. If you want to be registered under it too, keep these key factors in mind:

• Of course, you’ll have to act in full compliance with UK legislation.
• You must have an office in the UK.
• There aren’t clear restrictions on how much capital you can hold in the company’s bank account. However, you must fill out a form justifying the amount contained in it.
• UK residents must occupy senior management positions.
• Expect the FCA to carefully examine your documents before signing your license.

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More types of licenses — EMI and neo banking

An EMI (Electronic Money Institution) license allows an e-money institution (a company that deals only with money in its digital form) to operate. If you are interested in this kind of license, here’s what’s important for you to know:

• Your national state bank must approve the company’s management.
• The business can start within 12 months of receiving regulatory authorization.
• Under this license, you must file an audit once a year with a report received and submitted to the RNB (Revised National Budget), acting as a supervisory authority.
• You must have evidence of reasonable management, a well-established e-money issuance process, a clear organizational structure, and developed risk control procedures.

A neo-bank is an online bank that uses only digital channels to serve its clients. Typically, a company can offer neo-banking services in two ways:

• Obtaining an EMI license — Enabling digital payment services and the release of e-money, allowing the end-user to keep funds in the account.
• A PI (Payment Institution) license — Supports a variety of payment services allowing transactions to be made by card, mobile app, transfer, or debit card. Furthermore, a PI license supports cash withdrawals, account deposits, foreign exchange transactions, and data processing.

The bottom line

If correctly done, establishing a brokerage firm can provide a good return on investment. Keep in mind, though, that obtaining a brokerage license involves many obligations: You’ll have to act in accordance with strict rules, live up to significant capital requirements, and many more. All these factors demand your time and attention in order to be done right.

You should know that many of those who try to build this type of business fail to do so. However, I’m not trying to discourage you. Having some hard & soft skills can help you out, as well as generous investment capital, and the ability to adapt to industry changes. Discussing this information will probably make for too lengthy of an article, so I’ll revisit this topic in a future one.