Why does a broker hold 5 licences in 5 countries? Regulatory arbitrage

You land on a broker whose header proudly displays a licence from the UK's FCA. You open an account, accept the terms with a single click and start trading at one to five hundred leverage that no supervised broker in Europe is allowed to offer you. One small detail hid in the documents: the contract you signed was not with the British company, but with an entity registered in the Seychelles. That is not a mistake or an accident — it is regulatory arbitrage, a deliberate strategy of routing clients to wherever the rules are loosest. Below I explain how the mechanism works and how to check which entity actually holds your money.

What regulatory arbitrage looks like at a forex broker

Regulatory arbitrage is the practice where a single broker brand runs several separate legal entities across different countries and steers each client to the one bound by the least restrictive rules. A typical group holds an entity supervised by the FCA in the United Kingdom, a second under CySEC in Cyprus, a third under ASIC in Australia, and on top of that at least one offshore arm — in the Seychelles (FSA), Mauritius (FSC) or Belize. Each is a separate company with its own capital, its own licence number and its own scope of client protection. The brand is shared, but the legal responsibility is spread across several jurisdictions.

The heart of the strategy is that each entity offers different terms because it operates under different law. A client from Germany or Poland who registers through the very same website may end up under the Cypriot entity covered by European Union rules, or under the offshore arm beyond their reach. The choice is often made for them by the sign-up system based on country of residence, and the client accepts it without reading which company they have just selected. I set out this distinction more fully in the article on broker regulation by the KNF in Poland.

Why one to five hundred rather than one to thirty

Since August 2018 the European Securities and Markets Authority has capped retail leverage on major currency pairs at one to thirty, and the UK's FCA kept that limit after Brexit. The same package introduced mandatory negative balance protection and a ban on deposit bonuses for retail clients. These are hard rules that an entity holding an EU or a UK licence cannot break. From the broker's point of view they mean one thing: on those markets it is harder to attract a client with the promise of large leverage.

An offshore entity operates under an entirely different regime. A regulator in the Seychelles or Mauritius imposes no one-to-thirty cap, so the same broker can advertise one to five hundred and beyond there, add bonuses on top of a deposit and skip part of the disclosure duties. To a client chasing larger exposure on a smaller deposit this sounds attractive — and that is exactly why the marketing page foregrounds the high leverage while quietly assigning the registration to the offshore arm. I unpack the mechanics of the cap itself in the article on the one-to-thirty ESMA leverage cap.

"The restrictions on CFDs are necessary because these products are complex and risky, and the majority of retail clients lose money on them. We are introducing leverage limits, negative balance protection and a mandatory standardised risk warning to deliver the same protection to investors across the European Union." — Steven Maijoor, Chair of the European Securities and Markets Authority, 2018

Which entity you actually sign a contract with

This is the question that decides everything, and the one most clients skip. "Regulated by the FCA" in the headline of an advert does not mean your account is under the FCA — it means only that somewhere in the group a company holds such a licence. Your contract may be with a Seychelles entity, in which case the British regulator has no bearing on it at all. The brand is one, but it is the specific company named in the terms, not the logo on the website, that sets the scope of your rights.

Four things hinge at once on which entity appears on the contract. First, the protection of funds — whether they are genuinely segregated and under whose supervision. Second, the compensation scheme, meaning whether anyone will return even part of your money if the broker fails. Third, access to a financial ombudsman and to a court within practical reach. Fourth, the enforceability of a claim — a judgment against a Belize company can be a piece of paper. What exactly happens to a deposit in a bankruptcy I lay out in the article on what happens to your money when a broker fails.

Offshore account risks — what you genuinely do not have

An account under an offshore entity strips away concrete safeguards, not abstract ones. Most often there is no genuine supervision of capital and client-money segregation — some registers amount to little more than an annual fee, with no audit to protect your deposit. There is no compensation scheme, so a broker failure means no body is obliged to return your funds. Recovering money from a jurisdiction on the other side of the world is often expensive and, in practice, unenforceable.

On top of that sits a risk regulators name plainly: the "clone" of a genuine broker. This is an entity impersonating a licensed firm — it copies the name, the logo and the licence number, though it has nothing to do with the real broker. The UK's FCA and Poland's KNF regularly publish warnings about such firms, and the KNF public warnings list is open and free. The line between aggressive regulatory arbitrage and outright fraud can be thin, which is why it pays to know the signals that let you spot a scam broker in five minutes.

A hypothetical example — the trader and the vanishing FSCS

Consider an illustrative situation to see the stakes in numbers. A trader sees an advert for a "broker regulated by the FCA" and opens an account, convinced he is covered by the UK's FSCS compensation scheme, which protects clients of failed investment firms up to eighty-five thousand pounds. He deposits 20,000 PLN and trades at one to five hundred leverage that the FCA would never have permitted. After a few months the broker declares insolvency.

Only then does the trader read the terms carefully and discover that his contract was with an entity registered in the Seychelles, not with the British company in the group. The FSCS does not cover the offshore entity — so there is no body to return even part of the capital. The one-to-five-hundred leverage itself, unavailable at a supervised broker, was a warning sign he did not read. This is a hypothetical example, but it mirrors a real arrangement of entities that regulators warn about. I also show the differences in protection in the comparison of a local broker versus a foreign one.

What to do tomorrow

1. Open the terms and find the full entity name. Go into the documents you accepted at sign-up — the terms of business and the Key Information Document — and write down on a sheet the exact company name, the country of incorporation and the regulator licence number. If it names the Seychelles, Mauritius or Belize, you already know your account is not under European supervision, regardless of what the advert says.
2. Verify the licence number in the regulator register. Enter the full company name into the relevant regulator's search tool — for Poland the KNF public warnings list and the register of supervised entities, for the United Kingdom the FCA register. Check that the licence number belongs to exactly the company you signed with, and not to a different company in the same group with a similar name.
3. Treat leverage that is too high to be onshore as a red flag. If a broker offers a European retail client one to five hundred or a deposit bonus, assume you are landing beyond the reach of ESMA and your national regulator. Before you deposit a single unit, decide whether you knowingly accept losing negative balance protection and a compensation scheme — this is not a decision to make in three clicks.
4. Prefer an entity with an EU or a UK licence. When opening a new account, choose a company supervised by the KNF, another European Union authority or the FCA, even if it means lower available leverage. The broader walk-through on broker selection and safeguards sits in the regulations section on forexmechanics.com.
5. Keep copies of the documents in case of a dispute. Save the terms, deposit confirmations and correspondence in a separate folder. If a dispute or an insolvency ever arises, proof of which entity you contracted with and on what terms is the first thing an ombudsman, a regulator or a lawyer will ask for.

This article is educational and does not constitute investment advice. Always verify the regulatory status of a specific broker directly with the relevant supervisor.