How to choose a Forex Broker in South Africa for the safety of your funds

Retail online forex trading is popular in South Africa with about estimated 200,000 traders and more young people seem to be embracing this trend.

Choosing a broker can be confusing as they don’t charge uniform fees, they don’t give access to the same number of instruments etc. so it is important to compare the features that matter most and also consider your trading style before you settle for a broker.

There are some important points that you should check & compare before you open an account with a broker.

1. Regulation

The Financial Sector Conduct Authority (FSCA) is the market conduct regulator of all financial institutions in South Africa including Banks, Brokers, Insurers, Retirement funds, etc.  They issue unique Financial Service provider (FSP) numbers to each licensee. They also carry out on-site inspections where they could visit brokerage offices for physical inspection and demand documents, and off-site inspection where they could regulate brokers remotely from their own offices by demanding reports, documents, financial records etc.

Every forex broker must operate with a license which could be from the FSCA or from a regulatory authority of another country. However, it is safer for South African traders to do business with a forex broker holding an FSCA license because such brokers are under the authority of the FSCA and can be sanctioned if they breach FSCA rules and guidelines. If a forex broker goes bankrupt or chooses to be fraudulent, the FSCA will ensure their accounts are frozen and funds returned to their clients.

To check if a forex broker is licensed by the FSCA, you can get their FSP number or the broker’s entity name and go to the FSCA website at www.fsca.co.za and verify it on Authorized FSP search, here you can check for information about the broker like Contact Details, Compliance Officer, Products Approved etc. As per Safe Forex Brokers SA, this is a really helpful tool to verify if the broker is disclosing true facts to you on their website and personally.

FSCA also licenses OTC derivatives providers which CFD providers acting as principal need to apply under and many forex brokers have applied for license under this. But only 21 FSP are approved as ODPs currently for offering OTC derivatives.

The list of approved ODPs is available on FSCA’s website for which you can click on regulated entities menu on fsca.co.za > list of regulated entities and persons > OTC Derivatives providers > leave the entity name empty and click search. When the search result comes out watch out for the application status of the entities as some of their status read “Approved” while others read “Applied” and some read “Application withdrawn”. You should only choose FSPs with application status reading “Approved”.

2. Security

Financial service providers have suffered a lot of security breaches in recent times.

FXCM forex broker were victims of a cyber-attack in 2015 where multiple breaches resulted in fraudulent withdrawals from traders’ accounts and in 2020, Hackers breached ABSA Bank servers and stole information that was sensitive in nature.

While one cannot control the security in the broker’s office or what goes on at the broker’s data center or servers, one can at least ensure that the trading App has basic security features before they start using it. These are features such as two factor authenticity (2FA), password strength indicator, and also compliance with South Africa’s Protection of Personal Information Act (POPIA).

3. Online Investigation and Reviews

As per Safe Forex Brokers SA, there are around 20+ brokers that offer forex trading apps in South Africa, but only a handful of them are licensed by FSCA. Being licensed is not enough, you also need to check past complaints, regulatory actions, online 3^rd party reviews before you put any money with the broker.

As a broker may be licensed and have a wonderful trading App, they may still choose to perform duties outside their license mandate (like offering unapproved products). You could use Google to carry out some online investigation and see if the forex broker has had any court cases with the FSCA or any international regulators.

The case of JP markets where the FSCA took them to court to move for their liquidation for operating an unlicensed over the counter derivative business is an example. They however appealed the case and now the supreme court of Appeal has ordered the FSCA to stay action.

Other cases such as the one involving Oinvest, a forex trading company whose license was withdrawn by the FSCA and were taken to court and their accounts frozen for contravening sections of the FAIS Act are examples. The FSCA also suspended the exchange license of ZAR x (PTY) Ltd for non-compliance with section B (1) (a) of the financial markets Act.

All these cases should teach traders to always be sure a broker is licensed to operate a forex brokerage business and not another financial service before we patronize them and this is the counterparty risk that traders face. Such information about a broker’s history could guide you in deciding whether to patronize them or not.

Also go to your online App store to read user reviews about the brokers trading App. If the App is bad, people will leave negative reviews to that effect. If the broker delays in paying traders their money or if deposits don’t reflect in a timely manner, you will see complaints from traders using the Apps.

4. Fees

There are a lot of fees charged by forex brokers and some of them are considered hidden fees because you don’t even get to know about them till you are neck deep in a complex transaction.

Online Forex Trading involves various fees and costs like spread, commission, overnight charges etc. which can be overwhelming to understand for many new traders.

Your trading style determines how much fees you will be charged. If you are a scalper who profits off very little changes in the price of a currency, it means you will be opening and closing positions frequently and you will be charged commissions per roundtrip so you may want to patronize a broker that charges lower commissions.

However if you are a swing or position trader who holds positions for weeks or more, the round trip commissions will be less but you will be required to pay holding charges when you use a currency with a higher interest rate to buy a currency with a lower interest rate and keep the position open overnight.

Listed below are some basic fees you should check and compare to see what competitors charge.

• Spread – This is the difference between the Bid and Ask price of a currency pair. If EUR/USD Bid/Ask price is 1.01/1.04 it means people in the market are willing to pay 1.01 for the currency pair but the brokers are bent on selling it for 1.04 because they want to make money from the spread which is 0.03 i.e. (1.01 -1.04 ). This difference of 0.03 goes to the broker.

Now if you decide to buy from the broker at 1.04 it means when you want to sell you must sell at 1.01 and record a loss of 0.03 since that is what the market is willing to pay. So the wider the spread, the more your profits will be affected. Brokers make their money through widening spread so ensure spread is tight especially for widely traded major currency pairs like the EUR/USD

• Deposit – Most brokers don’t charge a fee for deposits so beware. Also check for the length of time it takes for the deposit to reflect in the account
• Withdrawal – Some brokers charge this when you withdraw money while some don’t.
• Account inactivity – Some brokers charge this when you don’t use your account for a while but some others don’t. If you don’t intend to trade often you may want to settle for a broker that doesn’t charge this fee.
• Commissions – These are charged by some brokers each time you open a trading position. However, some brokers don’t charge it and depend on spread to make their income.

5. Risk management tools

The forex market is very volatile so adequate risk management is important. Your broker should at the least be able to offer stop loss orders. A stop loss order is an automated order given by broker to client to close his open positions and execute a market order for the next available price once a predetermined “stop price” is crossed.

Some brokers offer an upgrade of the normal stop order called a Guaranteed Stop Loss Order (GSLO) which protects you from price gapping which could occur when the market is closed. Gapping occurs when the value of the currency falls so drastically that it skips the stop price and forces you to execute a market order at a price other than your stop price. GSLOs are better than ordinary stop orders and they ensure your stop loss order is executed at exactly the stop price and not below or above it. GSLOs usually come at a premium meaning you will have to pay for it. 

6. Trading platforms

Your forex broker should offer you more than one trading platform such as Meta trader 4, Meta trader 5, web trader, mobile app etc. to suit your trading requirements.

7. ZAR account domiciliation

Your forex broker should have trading accounts domiciled in the Rand currency to avoid undue currency conversion fees.

8. Customer support

Your forex broker should have various channels for customer support such as live chat service, toll free phone lines, prompt response to email inquiries, quick dispute resolution etc. This makes it easier to contact a broker even on weekends if there is an emergency.