Regulated brokers: here's how to choose a safe one

Written by
Fact checked by
Adam N.
Updated
Oct 2023

Choosing a safe and regulated broker from among the myriad of service providers available is an intimidating task. As the number of trading scams and fraudulent brokers increases rapidly, leaving in their wake billions of dollars in lost client money, finding a safe and legit broker is a crucial problem for online traders.

As a first line of defense, you should only sign up with regulated brokers supervised by a strict financial authority, also known as top-tier regulator. The 100+ brokers featured on the BrokerChooser site are all safe and legit options as each is overseen by at least one top-tier authority.

Key recommendations for finding a safe broker

I have received many emails from readers who lost their money to scammers and the team at BrokerChooser continuously helps users on how to avoid fraudulent brokers and recover their money if possible. Here's what you should pay particular attention to:

  • Never sign up with an unregulated broker.
  • Choose a broker that is overseen by a stringent financial regulator.
  • Look for brokers that are members in an investor protection scheme for extra security.
  • If you fall victim to a scam broker, recovering your money is nearly impossible.

The amount of money lost to scams and unreliable brokers is sobering, to say the least. Authorities reported fraud losses amounting to nearly $8.8 billion in the United States alone in 2022, up a staggering 30% from a year earlier.

The unique Scam Broker Shield tool developed by our team offers a simple solution for checking whether you should trust a particular broker with your money.

The foundation of safety: broker regulation

Imagine you're embarking on a long road trip. What's the first thing you check? Most likely, it's the condition of your vehicle. In online trading, your broker is your vehicle, and its condition is reflected in its regulatory status. The issue is far from trivial as you will be trusting your broker with your money.

Regulated brokers are like well-maintained cars – they come with guarantees of safety and reliability. Regulatory authorities, often government agencies or financial watchdogs, oversee and supervise these brokers. They ensure that brokers follow strict rules, maintain sufficient capital, and treat their clients fairly.

When you choose a regulated broker, you're placing your trust in an entity that's held accountable for its actions. In case of disputes or issues, you have a regulatory body to turn to for resolution. Always check if your broker is regulated and by which authority.

Our methodology, updated and finetuned continuously, states that BrokerChooser only reviews and recommends brokerages that are overseen by top-tier regulators. In our experience, working with brokers that do not have top-tier regulation is a risky endeavour.

There are several factors to consider when selecting a broker that will provide you with a secure and reliable trading platform and regulation is the top criteria. Here are the 3 basic tenets of picking a safe broker:

  1. Never ever trust an unregulated broker.
  2. Choose a broker with top-tier regulation.
  3. Sign up with a broker where you have access to investor protection.

Just because a broker is regulated it does not mean it will play a fair game. The reason for this is that not all regulators are created equal. Some are more stringent (we call them top-tier regulators) and therefore brokers licensed and overseen by them are generally regarded as reliable. Trust us, we have seen many cases where clients of brokers not overseen by a top-tier regulator ended up losing their money. We list some of the most reputable top-tier regulators in the following table.

Top-tier regulators
Name of regulator Country of operation
SEC (Securities and Exchange Commission) United States
FCA (Financial Conduct Authority) United Kingdom
BaFin (Federal Financial Supervisory Authority) Germany
ASIC (Australian Securities & Investments Commission) Australia
FINMA (Swiss Financial Market Supervisory Authority) Switzerland

A broker licensed and regulated by any of the above is most likely not a scam and will have to adhere to strict rules, including the segregation of client funds from its own, maintaining adequate capital reserves, and ensuring that clients receive timely and accurate information about their investments.

A broker may be overseen by multiple regulators if it operates in several countries and the business entity you’ll be dealing with depends on your country of residence. For example, if you open an account with Capital.com as a Malaysian citizen you will be onboarded by a legal entity of the broker that is overseen by the regulator in Seychelles. Even though this is not a top-tier regulator, the fact that Capital.com is also regulated by the FCA and ASIC significantly raises the broker’s trust score.

Bottomline: always make sure that the broker is regulated. If it has no regulatory oversight, do not open an account with them, no matter how enticing their offer.

Investor protection: your safety net

Staying with the above metaphor, let's say you come across a carnival on your road trip and you want to enjoy some thrilling rides. Before you take the plunge, you'd want to make sure there's a safety harness, right? In trading, that safety harness is investor protection.

Certain countries have established investor protection programs aimed at providing an additional level of safety for retail traders and investors. These programs bear resemblance to deposit insurance funds created to safeguard bank deposits in the event of a bank's insolvency. However, their purpose is to safeguard securities and cash held in brokerage accounts.

These investor protection funds are typically set up by the government of the country in question and financial firms (i.e. brokers) are required to pay a certain amount of money into the fund.

If a broker runs into financial difficulties or goes bust, this cash pool is there to compensate the broker’s clients and repay their money. Just like the harness on the ride, the investor protection will prevent your hard-earned money from falling into a bottomless pit.

Note that most investor protection programs have a coverage limit, in other words a maximum amount of funds that will be returned to you if your broker goes into bankruptcy.

Investor protection limits in key jurisdictions
Country Name of investor protection scheme Protected amount per brokerage account
US SIPC $500,000 for securities of which $250,000 for cash
UK FSCS £85,000
EU Different in each member state Minimum €20,000 - may be more in certain countries

If you sign up at a broker regulated in a country that has an investor protection fund, you will automatically be covered regardless of your nationality or place of residence.

In addition, top-tier regulators require brokers to segregate client funds from their operational funds. This means your money is held in a separate account, away from the broker's business funds. In case the broker faces financial trouble, your money remains safe. Yet another argument in favor of top-tier regulation.

Bottomline: investor protection ensures that even if your broker encounters financial difficulties, your funds will be recovered. It's like having an insurance policy for your investments.

Avoiding the scam trap

Imagine that you receive an email promising unbelievable profits with just a small investment. It sounds too good to be true, doesn't it? Well, it probably is.

Scammers are out there, preying on unsuspecting traders and investors. Be vigilant and skeptical of unsolicited offers. Legitimate brokers don't cold-call or send spam emails promising guaranteed riches.

With scams, it all comes down to prevention. Once you fall prey, there is a very high probability you will not be able to recover your money.

Learn how to spot the red flags, check the broker's website for regulatory and legal information, as well as clear contact information, including a physical address and phone number. Research online reviews and ask for recommendations from trusted sources.

Even though a broker seems safe and legit at first glance, dig deeper. There is an increasing number of broker clones, also known as clone firms, which are fraudulent entities that impersonate legitimate financial brokers, investment firms, or other financial institutions. They create fake websites, often with a striking resemblance to the real company's site and logo, and use deceptive tactics to lure unsuspecting individuals into investing their money.

Broker clones mimic the branding, website design, and even contact information of reputable financial institutions, making it challenging for potential investors to distinguish between the legitimate firm and the fraudulent clone.

Once you deposit money into the clone firm's accounts, these fraudulent entities often disappear without a trace. Contact becomes impossible, and you are left with significant financial losses.

Always verify that the financial institution is regulated by the relevant authorities in your country or region. Conduct due diligence by checking official regulatory websites to confirm their legitimacy.

Be cautious when receiving unsolicited investment offers, especially if they promise extraordinarily high returns with minimal risk. Legitimate financial firms do not typically engage in such tactics. Use official contact information obtained directly from the financial institution's official website or regulatory authorities to verify contact details.

When doing your online research, be wary of positive reviews that seem overly enthusiastic or biased.

Bottomline: falling victim to a scam can result in the loss of your entire investment. It's vital to stay informed and exercise caution when dealing with brokers and investment opportunities.

Do your homework to stay safe

When you're buying a new smartphone, you likely compare different models, read reviews, and make an informed decision. The same principle applies to choosing a broker – do your homework.

Research potential brokers thoroughly. Check their regulatory status, review their fee structures, and understand the products they offer. Read client reviews and seek recommendations from experienced traders. Take advantage of demo accounts to get a feel for the platform.

The BrokerChooser team has done much of the legwork for you and thoroughly analyzed more than 100 brokers globally by opening an live account, and making actual trades at each of these brokers while analyzing more than 500 datapoints for each service provider. Access our knowledge base and find a safe and legit broker that best serves your needs in our unique Find My Broker tool.

Your choice of broker will significantly impact your trading experience. By choosing a regulated broker, understanding investor protection, avoiding scams, and conducting due diligence, you'll be well-prepared for a successful and secure trading journey.In the world of online trading, knowledge is your most potent weapon.

In the world of online trading, knowledge is your most potent weapon.

FAQs

How can I tell if a broker is legitimate and not a scam?

You can and should do your own due diligence to determine if a broker is legitimate and not a scam. These are some of the most important steps you should take.

Make sure the broker is licensed and regulated. A legitimate broker should be licensed and regulated by a reputable financial regulatory authority, such as the Securities and Exchange Commission (SEC) in the United States or the Financial Conduct Authority (FCA) in the UK. You can usually find this information on the broker's website. Check their license number on the relevant regulatory authority’s website.

Check out the broker's reputation online by reading reviews and ratings from other traders. It’s wise to check whether the broker has been involved in any scandal or whether it has been fined for any kind of misconduct.

Verify the broker's contact information and check their customer service. Make sure the broker has a physical address and phone number. Contact the broker's customer service department and see how they respond. A legitimate broker should have a responsive and helpful customer service team.

Check the broker's fees and commissions. If they are uncharacteristically high, this may be a sign of scam.

If the broker advertises itself by guaranteeing high returns with no risk, do not trust them. All investments carry a certain amount of risk.

How do I check if a broker is licensed and regulated?

The first step in checking whether a broker is licensed and regulated is to determine the regulatory authority that oversees the broker's operations. This will depend on the country where the broker is based, your country of residence and the financial products and services it offers.

If a broker accepts clients from many different countries, it will have different legal entities for onboarding clients from various countries/regions. Find out which legal entity you’ll be dealing with and the regulator that oversees that particular entity.

As a next step, go to the broker’s website and look for regulatory/licensing information. This should include the name of the regulatory authority and the broker's registration number at the minimum. Most brokers will display this under a separate menu or at the bottom of the webpage.

You should verify the information with the relevant regulatory authority. Most regulatory authorities have online databases where you can search for registered brokers and investment firms. If you have any doubts about a broker's regulatory status, you can contact the relevant regulatory authority for clarification.

Can I get my money back from a fraudulent broker?

While it is possible to recover money from a fraudulent/scam broker, in most cases the victims end up losing their money. Recovering your funds can be difficult and time-consuming, the whole process may often take years.

Whether you’ll be able to get your money back depends on various factors such as the severity of the fraud, the jurisdiction where the broker is located, and the actions taken by you as a victim to recover your funds.

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Further reading

Author of this article

Edith Balázs

Fiscal Fables Storyteller | Forex • Safety • Financial Journalism

I bring 20+ years of experience as a correspondent having worked for Bloomberg, Dow Jones and The Wall Street Journal covering macroeconomics, stock, currency and fixed-income markets. I hold a Master's degree in American Studies and Journalism.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology.

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