The recent collapse of FTX, the second largest crypto-exchange, is a stark reminder that things can take a turn for the worst, when you expect it the least. In this article, we’ll focus on the steps you can take to verify your broker’s credentials before opening a trading account.
1. Website details
First, use a WHOIS look-up service to find out more about who registered the website and when. Domain name owners are compelled by law to register their contact details with their domain registrar.
Some domain owners use anonymization services to hide their identity. When this happens, their identity is masked. This should be a red flag if your broker’s website does so, as a reputable broker wouldn’t feel the need to hide his identity.
The WHOIS look-up service will also show the domain’s registration date. Importantly, this should roughly match the year in which your broker started trading. You should proceed with caution if the website was recently registered.
2. Broker’s details
It’s also a legal requirement in most countries for a company to publish its legal name, registration number and registered address on its website. You’ll typically find that information in the website’s footer.
We’d advise against opening an account if that information is missing. If the information is present, we’d encourage you to verify its authenticity by running a search with a company registrar.
For example, UK brokers would typically register a branch or a legal entity with Companies House, the UK’s company registrar. Look-up the company name in the UK company register to see when it was created, whether it’s still in business and who its directors are.
3. Regulatory status
However, checking that the company exists and still is in business isn’t enough. You’ll also need to check that it’s overseen by one or more reputable financial regulators and has the licences it needs to operate.
It will come as no surprise to you, but the world’s leading financial regulators are found in developed markets that have a track record of fighting financial fraud and tax evasion. These include, but are not limited to:
- Australia: Australian Securities and Investment Commission (ASIC)
- EU: Cyprus Securities and Exchange Commission (CySEC)
- UK: Financial Conduct Authority (FCA)
- USA: National Futures Association (NFA)
- Switzerland: Financial Market Supervision Authority (FINMA)
Some global brokers operate across a large number of countries, spanning developed and emerging markets. However, you should take care if your broker is only registered in offshore jurisdictions with lax controls.
It’s remarkably easy to create an off-the-shelf company in an offshore jurisdiction like St. Vincent and the Grenadines, the Marshall Islands, the Seychelles and the Bahamas. Offshore company registration services could help you incorporate within days.
It’s also important to note that offshore jurisdictions offer fewer investor protections, even when they are legitimate. For example, you’ll be covered by investor protection schemes if you open an account with a broker regulated in the UK or the EU. However, no such protections apply in the Bahamas.
4. Licence look-up
Last but not least, you’ll also need to check the scope of your broker’s licence even when they are overseen by a reputable regulator. This is harder than it sounds, because regulators use different licences and labels.
For example, some scam brokers have been known to register with New Zealand’s register of Financial Service Providers (FSP) in order to gain an aura of respectability. When they should have registered instead with New Zealand’s Financial Markets Authority (FMA).
Finally, check whether your broker’s licence is still valid, as some can expire or lapse.
5. Key employees
By now, you should have discovered the identity of the key people behind your broker – the CEO, key members of the management team and perhaps even shareholder information.
You could turn to LinkedIn to find out more about them. This is easiest done by logging in to your LinkedIn account to run a search on their names. If you aren’t logged in, LinkedIn may limit the number of searches you can make, or the information available to you.
It’s also a good idea to run a Google search on your broker’s key employees. Surround their names with double quotes to focus your search on the exact name, otherwise Google may return irrelevant matches. Unfortunately, the EU’s “write to forget” legislation has made it possible for people, including fraudsters, to remove links from search engine results. When this is the case, Google will indicate that some results have been removed.
6. Recent news
By the same account, it’s always a good idea to run a Google search on the website name itself, in Google’s normal search results, and Google News service. A Google search could help uncover reviews on Google, Facebook or websites like TrustPilot. A news search tends to return fresher results than would otherwise appear in regular results, helping you stay on top of new developments.