If you want to run a broker using the b-book model, starting a FX/CFD broker in the UK is not a cheap way to do it.
High minimum capital requirements and operating expenses mean that many start up companies look to offshore regions to start a FX/CFD broker. That’s not necessarily a bad thing to do but there are more affordable ways to start a FX/CFD broker in the UK.
The primary ways to do this are via a 75K license or to become an appointed representative. These two options are somewhat similar but there are differences worth considering too if you are weighing up starting a FX/CFD broker in the UK.
What is the UK FX/CFD £75k license?
The £75k license issued by the Financial Conduct Authority, the UK regulator, is effectively an introducing broker license. This is an affordable way to start a FX/CFD broker business in the UK with an FCA license.
In official terms, a FX/CFD provider that has a £75k license is operating as a small and non-interconnected firm (SNI) under the Financial Conduct Authority’s (FCA) Investment Firm Prudential Regime.
To put that in layman’s terms, you are free to market and sell a broker’s FX/CFD offering. You are also able to partner with different firms, rather than a single one.
However, a firm with this license cannot hold client funds and cannot deal on their own account. So you cannot operate the b-book model or hold the clients funds necessary to operate the a-book model with this license.
Perhaps most significantly, you have to stump up £75k as a minimum capital requirement in order to receive the license.
What is an appointed representative for FX/CFD brokers under the FCA?
An appointed representative is very similar to an introducing broker as described in the section above.
In effect, if you start a FX/CFD broker in the UK by acting as an appointed representative, you will be operating under the regulatory umbrella of another firm. That means a huge bulk of the compliance burden is taken away from you.
As with the introducing broker license, a FX/CFD broker operating as an appointed representative cannot hold client funds or run a b-book. In this sense you are a lot like an introducing broker.
However, appointed representatives can build their own brand, front end trading platform and so on. In other words, a client coming to you and using your services will not see that you are working under the regulatory framework of another firm.
What is the difference between an appointed representative and an introducing FX/CFD broker using the £75k license?
There are a few key differences between the FCA’s £75k license and acting as an appointed representative. These may not seem like large differences but they make a big difference so they are worth understanding.
1. Appointed representatives cannot partner with multiple firms
If you start a FX/CFD broker as an appointed representative in the UK then you will not be able to partner with multiple brokers. Instead you can only deal with the firm that you are acting as an appointed representative of. This firm is known as your principal.
In contrast, the holder of an FX/CFD £75k license can work with as many providers as they wish to. The potential benefit of this is that you can move between providers more easily, depending on what makes you the most money.
To clear up one point here for those that have been looking at the FCA website, based solely on regulation, it would be possible for an appointed representative to have multiple principal agreements. However, the logistics and cost of doing this make it effectively impossible for FX/CFD brokers – hence why we make the point here.
2. Appointed representatives in the UK have no capital requirements, introducing brokers with the £75k license do
One of the main attractions of starting a FX/CFD broker as an appointed representative in the UK is the fact that you have no capital requirement. In contrast, an introducing broker has to stump up £75k to get their license.
However, there are trade offs that you should keep in mind here, which we look at further on in this article.
3. Appointed representatives do not have to apply for a license from the FCA
Although there is still some bureaucracy involved in becoming an appointed representative, you do not have to go and apply for approval for a license from the FCA. In contrast, if you want to start a FX/CFD broker business using the £75k license, you will have to apply to the FCA for approval.
This a major difference and one that should not be overlooked. If you are keen to start your FX/CFD broker business as soon as possible then an appointed representative agreement may be the best option for you.
Appointed representative vs £75k introducing broker – the trade off
As noted above, one of the benefits you’ll frequently see touted by people trying to convince you to become an appointed representative is that you have no capital requirement.
On the face of it, this is a big positive. Stumping up £75k for an introducing broker license, which you then cannot touch, may be a lot of money for an individual or start up. Having that money means you can put it to use on business development or marketing.
However, there is a big caveat to be aware of here. A lot of appointed representative agreements will involve a monthly fee and revenue share model. The simple way to put this is that each month you pay whatever is higher – a fixed fee or a fixed proportion of your revenue.
For example, we have found at least two firms offering appointed representative agreements who ask that you pay £5k as a flat fee per month. However, the revenue share component of that agreement means you also agree to pay them 20% of your revenue instead if that amount is above £5k.
To illustrate this, imagine if you made £8k in a month. In that case, 20% of your revenue would be £1,600. As the £5k fixed fee is higher, you would pay £5k that month as a fee to your principal – the firm you have the appointed representative agreement with. However, if you made £50k in one month, then 20% of your revenue – £10k in this instance – would be higher than your fixed fee. As you pay whichever is higher, that means paying out £10k.
Another factor to think of here is that, unless you believe you can really hit the ground running, you may not be immediately hitting the minimum fixed fee your principal is asking for. That being the case, you would have to pay out from any cash your company has in the bank.
Finally, that cash you pay to the principal is gone. They aren’t going to give you back the money you are paying them as a monthly fee.
In contrast, if you set up as an introducing broker, it may be the case that you have to pay up £75k – but that money is still yours and you can get it back. The money going to your principal is not.
Restrictions on appointed representatives for FX/CFD brokers
Another important consideration here is the fact that, as an appointed representative, you are effectively outsourcing your compliance to another firm.
This has big upsides and downsides. The upside is that you do not have to deal with a lot of the regulatory burden that full licensed firms do.
The downside is that you have to abide by the rules set by firm you are working with. Some of these rules can be stringent and some of the terms of the agreement may be strict. For example, access to data or forcing you to be physically located in the same office may seem extreme but it happens.
The way to avoid these potential negatives is to make sure you have a good idea of what the terms of the agreement will be. In other words, what is the principal firm you are partnering with expecting of you?
The best way to think about this in practice is to have your own business plan and an idea of how you would attract clients and carry out your business. If that does not fit with how a potential principal firm wants you to operate, then don’t partner with them.
Appointed representative FX/CFD broker vs £75k license – which is better?
If you are looking to start a FX/CFD broker and want a clear cut answer on this then, alas, we don’t have one. It ultimately comes down to those two dreaded words – it depends.
You will have your own business idea, own financial situation, own go to market strategy and so on. All of those things influence how you go about doing business.
Despite restrictions and a lot of potential pitfalls, we see the appointed representative regime as a good way for start up FX/CFD brokers in the UK to go to market and start onboarding clients.
Having said that, if you have a good marketing and sales strategy, as well as the capital to acquire it, then an FCA FX/CFD £75k license can be a good option.
Anyone looking to set up a FX/CFD broker in the UK on the cheap is not going to be able to operate the b-book model, so these really are your main options.