It has become increasingly popular to start a forex broker in Labuan over the past few years. Labuan is part of Malaysia but has its own financial regulator – the Labuan Financial Services Authority – and is essentially a jurisdiction for offshore financial services.
The region offers a regulatory framework for providers offering rolling spot FX contracts, has low tax, and is not as restrictive as many other regions, in terms of the terms that you can offer clients.
Forex brokers are regulated in Labuan under what is called a ‘money broking license’ by the FSA. As you may be able to infer, this is one of the main downsides of the Labuan license – it only lets you offer crypto and rolling spot FX contracts. You cannot use this license to offer CFDs on securities, like index futures, commodities, and shares.
In this article we’ll look at how you can start a forex broker in Labuan and the benefits and downsides of doing so.
Why would you start a forex broker in Labuan
There are multiple reasons as to why executives are going to get Labuan money broking license.
1. Low tax
The corporate tax rate in Labuan for forex brokers is 3%. This compares to substantially higher levels in more developed regions like the UK or Cyprus. This means brokers can retain more of their earnings.
2. Regulated but not heavily regulated
Unlike several other offshore regions, Labuan has a regulatory framework for offering CFD trading. However, unlike the UK, EU, and several other jurisdictions, you can offer clients higher leverage and there are not restrictions on marketing practices, such as deposit bonuses and trading contests.
3. Banking
At the time of writing, Labuan offers superior banking and payments services to other offshore services. This is often a huge pain point for brokers and access to higher quality services is very beneficial.
Overview of FX/CFD license in St Lucia
| FX/CFD license in Labuan | |
| Time to launch | Approximately 6 months |
| Company registration and licencing costs | Application fee of $350 – $1,550. This is likely to be significantly higher when you factor in using a consultant and/or lawyer |
| Company annual operational cost | Annual charge of RM 5,000 ($1,075 approx.) + cost of office |
| Tax | 3% |
| Accounts filing | Required |
| Physical presence | Required – 2 local employees minimum, along with a physical office |
| Capital requirement | RM 500,000 (approx. $110,000) |
| Anonymity | Limited |
| FX/CFD regulations | Leverage on FX pairs is restricted to 100:1. For cryptocurrencies leverage is restricted to 2:1. CFDs where the underlying is a security cannot be offered with a Labuan license. |
Steps to start a forex broker in Labuan
Unlike offshore regions which offer no regulatory framework for CFD trading, if you do decide to start a forex broker in Labuan, you will have to get approval from the Labuan Financial Services Authority (LFSA).
No one case is the same but the approximate steps that you will have to take in order to get the license are as follows:
- Incorporate an entity in Labuan
- Gather all of the documents you will need for your application
- Ensure that on the ground measures, such as a physical office, are in place
- Submit documents to regulator
- Have a meeting with the regulator – this can be done online over a service like Zoom or Skype
- Set up your banking and payment services
How long does it take to start a forex broker in Labuan?
We estimate that it will take you upwards of six months to get the Labuan money broking license.
Every case is different and it may take longer or it could be faster.
Something we would note is that when you start a forex broker in Labuan or really anywhere, the likelihood is that you will have to use a legal service or consultant.
We have found that these companies often promise fast processing times in order to win business.
For example, they will often quote a time frame from the time your application is submitted to the regulator. The reason we put this in bold is to note that a lot of other work is required before you get to this point. You cannot just apply to the regulator on day one.
The most important factor in this process is also that you cannot apply for banking services until after regulatory approval has been given. Banking services can take months of waiting before approval so this should be factored into any decision you make.
How much does it cost to start a forex broker in Labuan?
Getting the money broking license in Labuan is likely to cost you in the region of $150,000 to $200,000.
However, it’s worth noting that the biggest part of that amount is the capital requirements that are part of the Labuan money broking license regulatory framework. Currently brokers must hold RM500,000 – around $110,000 at the time of writing.
So this money is not a cost per se, in the sense that you don’t lose it. But you cannot use that money to run your business and you will have to prove that you have it in order to get the license.
Other major costs that you will have to consider are…
1. Legal and consulting costs
The overwhelming likelihood is that you will need a legal firm and/or compliance specialists to set up your corporate entity in Labuan and make your application to the LFSA. Fees are not transparent and providers range massively in how much they charge. Moreover, some services, such as notarising IDs and bank statements, will depend on where you are from and the local costs there.
2. Physical presence
As we’ll see shortly, the Labuan money broking license requires you to have a physical office with two local employees. It is hard for us to put a precise cost on this because it really depends on your set up. There are ways to reduce this cost though and still meet regulatory requirements.
What are the yearly costs of a Labuan money broking license?
Brokers that get a money broking license from the LFSA have to pay an annual fee to the regulator of MR5,000 – or about $1,075 in US dollar terms at the time of writing.
However, as with the start up costs, if you are planning on starting a forex broker in Labuan then there are a few other costs you need to be aware of.
1. Physical office
Yup. This again. As with the above, you will need to pay two local employees and the costs of maintaining an office – this requirement does not go away once you have your license.
2. Accounts filing
One of the requirements of the Labuan license is that you have to file annual accounts. Although this is not likely to be a huge amount, it is an ongoing cost and, unless you fancy filling out your own accounts and filing them, it is an administrative one that you are likely to have to outsource.
Labuan money broking license – important rules for FX/CFD brokers
Labuan is not like St Lucia or the Marshall Islands. As should be clear from this article, there are regulations which govern what you can and cannot do when offering CFDs to clients if you start a broker in the jurisdiction.
It is worth familiarizing yourself with these via the LFSA’s own website and the guidelines it has for existing license holders and potential applicants.
Regardless, we think these are some of the key rules you need to be aware of if you are thinking of applying for a money broking license in Labuan.
1. Leverage restrictions in Labuan
Leverage is capped at 100:1 for brokers that receive a money broking license. This is higher than in other regions but it is still far lower than what you can offer in unregulated regions, as well as other offshore jurisdictions, such as the Seychelles or Vanuatu.
2. STP only
One of the weird nuances of the Labuan money broking license is that you can only offer products as an agent but not principal. But then at the same time the products you are allowed to offer effectively mean you can only act as principal. Weird.
Anyway, what this means in theory is that you cannot b-book client trades and must hedge out all your exposure.
There are different ways around this, in theory, such as setting up another entity as the execution venue for trades or simply making some sort of rebate agreement with your liquidity provider.
3. No CFDs on a security
The Labuan money broking license does not allow a broker to offer CFDs on an underlying security. This means you can’t offer CFDs on indices, commodities, or shares.
4. You can offer crypto
We touched on this briefly but would highlight this as a major strength. That crypto services are permitted means you aren’t doing anything in a regulatory gray area by offering them. It also means you can offer a wider range of products by offering some sort of crypto-derived version of them.
Labuan money broking license – positives and negatives
If you’ve read all the way through then it should be clear there are strengths and weaknesses to the money broking license, which are worth considering before you start a forex broker in Labuan. It’s worth reiterating these so we list them below.
Positives of the Labuan money broking license
1. Good regulatory framework
Labuan offers a nice balance between a trustworthy regulatory framework but without being as restrictive as many of the more developed markets. This means you can still gain trust from the client on the regulatory side but also not be so held back by marketing restrictions.
2. Banking
Although it can be time consuming to access, Labuan offers comparatively good banking services to brokers. Payments and banking is usually one of the biggest headaches for brokers so this point should not be overlooked.
3. Low costs
Compared to developed markets Labuan is not an expensive jurisdiction to do business in. That applies to both set up costs and your ongoing charges.
4. Low tax
At 3%, corporate tax is not the lowest you’ll be able to find among offshore regions but balanced against its other strengths, it is still at a very attractive level.
5. Crypto
The Labuan money broking license allows you to offer crypto services. As we highlight above, this is a real strength for brokers and one that should not be overlooked, as it goes beyond just the fact that clients can trade in crypto products.
Negatives of the Labuan money broking license
1. You can only offer FX and crypto
The main downside of the Labuan money broker license is the fact you cannot offer CFDs on securities. This means you are severely limited in what products you can offer to clients using this license.
2. Not ideal for ‘bootstrap’ start ups
There is an argument to be made that if you don’t have the capital needed to operate in Labuan, you probably shouldn’t be trying to start a broker. Having said that, providers can scale up from a very low cost base and if you are trying to do this then Labuan may ultimately be too pricey for you.
3. Restrictions on acting as principal
The Labuan money broking license prohibits firms from acting as principal. This means you cannot, in theory, b-book client trades. Given that CFDs are permitted by the regulator, this rule doesn’t make much sense to us. Nonetheless, in theory this means you should only offer STP trading. As we note above, we think there are simple ways around this ‘problem’.
4. Physical office requirement
The Labuan money broking license requires you to have two local employees and a physical office. There are ways to reduce this cost but it is a cost nonetheless – and one that does not go away once you have received approval from the regulator.
