Less regulated environments have long appealed to FX brokers seeking to offer clients higher leverage, creating a thriving licensing market in exotic locations such Vanuatu, the British Virgin Islands, Belize, Bermuda, Mauritius, the Cayman Islands and Seychelles.
Brokers looking to target Europe have in the past favoured Cyprus due to tax considerations and the availability of infrastructure and people with market knowledge. But the better-resourced brokerage firms now appear to be looking towards licensing in more expensive but also more lucrative markets such as the UK and Australia.
Demand for licences from the UK’s Financial Conduct Authority in particular is far outstripping supply, according to Chris Rowe, director of Financial Technology Consultancy Services, which specialises in buying and selling regulated brokerage businesses in the UK and overseas.
Buying an existing licence without active currency operations may not be a suitable decision
Amirani Azaladze, Forex Brokers License
“We are also seeing an increase in demand for fully operational licences, where in the past there was more focus on dormant licences,” he says. “I think some of the larger brokers see this as a good way of buying a new client base.”
Where a broker’s clients are based will also influence which licence is most attractive.
“Southeast and Far East Asian clients favour Asic [Australia] and FCA, whereas those in the Middle East prefer CySEC [Cyprus],” says Rowe. “Traders like to open accounts with a brokerage that has one of the primary licences, even if they end up papering with their offshore entity so traders benefit from higher leverage.”
Licensed companies are subject to fluctuation in market prices based on supply and demand, observes Emily Helmer David, head of partnerships at Clearsky Network.
“In 2023, there was strong interest in Mauritius and South Africa-licensed companies,” she says. “Now we are seeing increased demand for EU companies due to interest in entering regulated European markets and the fact that larger brokers are gaining market share with their capability to hold multiple licences, including the more expensive and lucrative European licences.”
The main difference between onshore and offshore jurisdictions from a licensing perspective is that the licensing framework with respect to anti money-laundering (AML) and know-your-customer (KYC) requirements from the ultimate beneficial owner is much stricter onshore. The UK’s FCA disclosure requirements are more stringent than those of Mauritius’s regulator, the FSA, for example.
Core factors
Whether it is better to buy an existing brokerage business or start a new application will be determined by two core factors.
Firstly, jurisdictions can vary widely in terms of what is required to set up a new licenced brokerage and how long this application process will take. Secondly, an existing regulated brokerage may be happy to wait for a new application to be completed, but those looking to move business to a new company may not want to wait up to a year for an FCA application to go through.
“For the big three licences [UK, Australia and Cyprus], we are seeing increasing demand for clients to purchase existing brokerages rather than making a new application,” says Rowe. “I have even had it mentioned to me recently that 90% of new FCA applications fail, so there is a significantly higher chance of getting a UK regulated brokerage by buying an existing business and then doing the change in control.”
Helmer agrees that acquiring an existing licence is proving more appealing than applying for a new one for brokers that are keen to enter new markets quickly.
“The timeframe for establishing a licence has increased significantly over the last few years due to enhanced AML policies,” she says. “Furthermore, in certain jurisdictions regulators are not eager to issue new licences.”
From a regulatory body’s perspective, obtaining a new licence is similar to changing shareholders and directors in an existing entity, in that both parties must justify the transaction. There have been instances of licence revocation during the process by various regulators in offshore and onshore jurisdictions, says Amirani Azaladze, chief executive of Forex Brokers License.
“However, buying an existing licence without active currency operations may not be a suitable decision,” he adds. “The transfer process and regulatory approval take the same time as obtaining a new licence, and the cost of the existing licence is often significantly higher.”
