Start a FX/CFD broker in South Africa

It has become increasingly popular to start a FX/CFD broker in South Africa over the last five years. Partly that’s because it has become increasingly expensive to start a FX/CFD broker in Europe. 

But it’s also due to the increasing uptake of smartphones and other internet-enabled devices in South Africa, which means there are now many more prospective clients in the country and wider region than there were a decade or more ago.

FX/CFD trading in South Africa is regulated by the Financial Sector Conduct Authority (FSCA). As we’ll see, if you want to start a FX/CFD broker in South Africa, there are two types of license that you can get from FSCA.

The primary reason we see executives getting an FX/CFD license in South Africa today is because of the comparatively low cost, regulatory framework, and range of services one can provide with the license. A South African entity can also act as a regional hub for brokers operating in Africa.

Why start a FX/CFD broker in South Africa?

1. Low capital requirements

The FSCA’s FX/CFD license does not have pre-defined capital requirements, which you’ll find in many onshore and offshore jurisdictions. Instead brokers must have sufficient capital to meet their operational expenses. In this sense, the system is much more flexible and permissive, as it means the capital requirement is proportionate to a broker’s needs, rather than just being an arbitrary figure.

2. Less restrictive regulations

South Africa does not restrict leverage or certain marketing practices, such as offering deposit bonuses. Brokers that want to offer these services are thus free to do so.

3. Entry way to African market

A lot companies will start a FX/CFD broker in South Africa but use their FX/CFD license from the FSCA to on board clients across the region. The FX/CFD industry is not unique in this regard, as lots of global companies will have their African headquarters in South Africa.

Licenses for FX/CFD brokers in South Africa

There are two types of FX/CFD license in South Africa, both of which are issued by the FSCA. These are imaginatively called a category 1 license or a category 2 license. There are some important differences between the two, which are worth considering before you try to start a FX/CFD broker in South Africa.

1. FSCA Category 1 License

The FSCA category 1 license, which you’ll often see shortened to ‘Cat-1’, is typically used by FX/CFD brokers to provide intermediary services – in other words being a broker. A holder of this license can get advisory permissions as well but the likelihood is anyone starting a FX/CFD broker won’t want to do that. Another important component of this license is the permissions you hold. When you apply to the FSCA, you have to specify what instruments you want to deal in as a financial services business. In theory that could mean you get a license where you are only able to deal in derivatives like CFDs. Alternatively, you may want additional permissions, so that you can add things like equities.

2. FSCA Category 2 License

The FSCA category 2 license, again often shortened to ‘Cat-2’ by people in the FX/CFD industry, is really an add on to a category 1 license. It allows FX/CFD brokers to provide discretionary services to clients. Or in simple terms, you can provide a service where you are allowed to make buy or sell decisions over a clients account. The primary reason to get this license is if you want to add copy trading or similar services. You cannot offer that service without this license.

South Africa over-the-counter derivatives provider (ODP) license

Readers with some existing knowledge may be aware that the FSCA introduced a new requirement in 2018, for FX/CFD brokers to operate as over-the-counter derivatives providers. You will sometimes see this referred to as an ODP license.

Getting approval as an FX/CFD broker does require explicit permissions to offer derivatives and the ODP license is separated out in such a way that it can make it look as though the license is distinct from the category 1 and category 2 licenses listed above.

This is not actually the case. In effect, an FX/CFD broker in South African will have category 1 and/or category 2 permissions. Offering FX/CFDs as an ODP is one component of these licensing regimes, which is why we don’t list it here as a specific license that you can get.

Steps to get a FX/CFD broker license in South Africa?

The process to start a FX/CFD broker in South Africa is a lot like other onshore jurisdictions. It involves registering a company, putting together a set of documents, and then submitting your application to the regulator. The below is not an exhaustive list of the requirements but it should give you some idea as to what you have to do.

1. Register a company

Registering a company in South Africa is fairly straightforward and is quite similar to registering a company in the UK. It can be done in under a day, either directly through the South African government website BizPortal or via a third-party entity. It shouldn’t cost more than $100, even if you choose to use a third-party.

2. Put together your FX/CFD license application for the FSCA

The application to start a FX/CFD broker in South Africa is long and requires a lot of supporting documentation. This is not an offshore unregulated jurisdiction. There are a few key documents you’ll have to gather, which includes…

3. Notarised identity documents and personal records

This will mean gathering a range of documents that, for the most part, you will have to get notarised by a lawyer or similar official. This includes…

• Passport
• Driving license or other form of ID that is not a passport
• Police records
• Bank reference letters
• Educational qualifications

4. Business plan

The business plan is essentially a range of documents showing what your plans for your FX/CFD brokerage business are, including things like target customers, marketing and sales tactics, and revenue forecasts.

5. Business operation documents

These are effectively a set of documents that detail your back office plans for your FX/CFD brokerage business. The key things here are a risk management policy, anti-money laundering policies, and security policies.

6. File application and respond to any further questions

Once you have put together all of the documents above you will be able to submit your application to start a FX/CFD broker to the FSCA. You are likely to be asked by the regulator for clarifications and to submit other documents if they believe some are lacking in detail. It is thus in your interest, to make the application process as smooth as possible, to provide everything that is asked for by the regulator.

How long does it take to start a FX/CFD broker in South Africa?

The suggested time lines we have seen would indicate that it takes up to 8-12 months to start a FX/CFD broker in South Africa.

We think this can be done faster but it is entirely dependent on the executives starting the brokerage.

The defining factor, which we cannot emphasise enough, is to ensure that you have put together all the documents correctly before you submit your application to the regulator. The poorer quality and more incomplete your application is, the more the process will drag on.

How much does it cost to start a FX/CFD broker in the UK and get an FCA FX/CFD license?

Research we have seen suggests the price range of starting a FX/CFD broker in South Africa is $120,000 to $180,000.

However, much as we know that people hate nuance and only like clear cut answers, there is no fixed answer here. The costs of starting a FX/CFD broker in South Africa range because there is no fixed capital requirement.

This is actually a big positive for the license as it means your capital requirement is going to be more suited to your business model. However, the downside is that, for the purposes of this article, it makes it hard to put a precise figure on how much it will cost you to get licensed.

What are the capital requirements for FX/CFD brokers in South Africa?

The FSCA does not have a fixed capital requirement for FX/CFD brokers. Instead, the capital requirement varies depending on your business plans. How big or small you are as a business, or expect to be as a business, will determine what your capital requirements are. We view this as one of the main strengths of the South African licensing regime for FX/CFD brokers.

What are the yearly costs of running a FX/CFD broker in South Africa?

We estimate that a good ballpark figure for running a FX/CFD broker is $100,000 annually. This is not a firm figure and it’s completely plausible you can set things up so that you are paying substantially less than this amount.

The key costs to be aware of are renting an office and hiring local employees. You also have to meet certain requirements, like filing accounts and paying annual fees to the regulator. 

Nonetheless, the main costs are going to be people and a physical office.

What are the physical presence requirements for FX/CFD brokers in South Africa?

South Africa does have physical presence requirements for FX/CFD brokers. You must have both local employees and a local office. You cannot outsource these as you can in offshore jurisdictions.

With regard to employees, there are two roles that you must have locally. One is a compliance function. Put simply, this is a local compliance officer who has to make sure your business is meeting its compliance standards.

The other role is what the FSCA calls a ‘Key Individual’. A key individual is someone that effectively oversees your business. The regulator defines a key individual as someone overseeing the activities of a company providing financial services.

The best way to think about this is that the person is a local CEO, whose role is primarily operational and compliance-based. They have to make sure the business is run properly and that it is also meeting compliance standards. 

Another important point to note is that a Key Individual must pass an exam before they can take up the role. This means when hiring, you will have to find someone that has passed the exam or make them take it.

The other point to be aware of here is the physical office. You don’t have to register your business at the same address as your office but you must have a physical office – you cannot use a post box or similar to run your company.

Are FX/CFDs regulated in South Africa?

FX/CFD trading is regulated in South Africa by the FSCA. To deal in FX/CFDs, a broker must get permissions, as part of their Cat-1 and/or Cat-2 license, to deal in over the counter derivatives. This is called an ODP license.

It is important to note that the regulator is serious about this. Companies have been fined for not getting the requisite ODP permissions. Getting them can also be a laborious process. We note that one broker claimed they had to meet the regulator over 70 times before getting approval. This may have been an exaggeration but the point remains that getting a FX/CFD license in South Africa is not a walk in the park.

However, there are some other areas that brokers tend to look at, in which South Africa is not so strict.

1. Does South Africa have FX/CFD leverage restrictions?

No, FX/CFD brokers are not limited in how much leverage they can offer clients. Having said that, we would not recommend offering ridiculous levels of leverage to clients as the regulator does monitor the industry. This is not an offshore, unregulated jurisdiction.

2. Can FX/CFD brokers in South Africa offer deposit bonuses

Yes, brokers in South Africa can offer deposit bonuses and use other, similar marketing tools, which are not permitted in Europe.

Starting a FX/CFD broker in South Africa – the positives and negatives

South Africa offers several key benefits but also has some significant downsides as well. It’s worth weighing these up before you look to start a FX/CFD broker in South Africa.

South Africa FX/CFD broker license – the positives

1. Capital requirements that suit your business

We think the capital requirements in South Africa are actually more logical than in many other parts of the world. That is because they fluctuate depending on how big your business is. As a result, South Africa is a more attractive place to start a FX/CFD broker as a small company.

2. Banking

South Africa has decent banking options. Given the costs of setting up there relative to other jurisdictions, we think this is a key advantage of starting a broker in the country.

3. Gateway to Africa

South Africa is used by lots of companies, not just in the FX/CFD industry, as a stepping stone into Africa. You are seen as having a local presence and it will be better for your branding to have that presence.

Regulatory framework

South Africa offers a stronger regulatory framework than many offshore jurisdictions but without the cost of being in a more developed market like the UK or Cyprus. At the same time, although those regulations enforce good corporate governance, you can still offer high leverage and use marketing practices, like deposit bonuses.

Banking and payments

If you choose to start a FX/CFD broker in South Africa, the range of banking options available to you is likely to be superior to those offered in offshore jurisdictions.

South Africa FX/CFD license – the negatives

1. High tax

Without doubt one of the biggest problems for FX/CFD brokers in South Africa is tax. At 28%, corporation tax is higher than almost any other major jurisdiction for FX/CFD trading, including the UK.

2. Capital controls

South Africa has capital controls on foreign exchange. Although there are certain legal exemptions and ways around these rules, they have the potential to be cumbersome to deal with and can make getting money in and out of the country difficult.

3. Potentially burdensome regulations

South Africa’s FX/CFD license does permit higher leverage but many of the other restrictions around reporting and the local physical presence and personnel may be too restrictive for a start up broker.

Should you start a FX/CFD broker in South Africa? Final thoughts

The FSCA licensing regime for FX/CFD brokers is a favourable one and we think the country is actually overlooked by start up players, for whom it is possibly the most affordable onshore jurisdiction to get licensed in.

South Africa ultimately offers decent banking, comparatively low start up and operational costs, and a regulatory framework for FX/CFD trading. 

Although it’s likely to be favoured more by FX/CFD brokers looking to expand in Africa, we actually think the license could be used in much the same way many providers today are using offshore licenses, like those issued in the Seychelles or Mauritius. 

If you are eager to start your FX/CFD broker tomorrow, then the waiting times may be an issue. But if you are already established offshore and want a more respectable license, starting a FX/CFD broker in South Africa is a strong option.