Finding a reputable broker
First check whether the provider is authorised by a financial regulator in the EU. Only once that's settled is it worth looking at fees and the app.
Learning objective: After this lesson you'll recognize a reputable broker by its authorisation from a regulator.
Before you look at fees or the app, check one single thing: is the provider authorised by a financial regulator in the EU, and is it listed in that regulator's public register? In Germany that's BaFin, in Belgium the FSMA, in Austria the FMA.
Checking the registers
You can search these registers yourself, it takes two minutes. The provider must be listed with its full name and registered office. If you can't find it, or only a similar sounding company on a faraway island, stop right there.
Warning signs
The warning signs are common and mostly the same. Someone calls or messages you and pushes you to deposit. Returns are promised. You get a personal adviser who looks after you touchingly. Depositing goes smoothly, but withdrawing suddenly runs into problems.
How legitimate brokers work
With a reputable broker nobody calls you. You open an account yourself, transfer money yourself and trade yourself. Anyone who's desperate to help you get rich wants your money.
The EU has what's called the European passport. A broker authorised in one member state may offer its services in all the others too. Supervision then stays with the home country. That matters if you ever need to enforce a claim. You can check authorisation in the national regulator's register and in the central register of the European securities regulator ESMA.
Custody of securities and cash
Distinguish how your securities and your cash are held. Securities are held for you as a segregated asset and don't belong to the broker's estate if it goes bust. Money in the cash account, on the other hand, is a deposit and falls under deposit insurance with its limits. So also ask which bank holds the cash account.
Misleading use of a regulated firm
Dubious providers often use a trick. They advertise with a regulated company from the group, but you sign the contract with a sister company in a country without serious supervision. The only company that counts is the one in your contract. You'll find it in the contract documents and the legal notice. It's rarely in the advertising.
Summary
- Check the authorisation in the public register first, then everything else.
- The company in the contract counts, not the one in the advertising.
- With reputable providers nobody calls you.
Did you get it?
What do you check first with a broker?
Whether it's in a regulator's public register and which company you're signing the contract with.
How does protection differ for securities and cash?
Securities are segregated and protected if the broker fails. Cash is a deposit and only protected up to the deposit insurance limit.
What's a typical warning sign?
When someone contacts you out of the blue, pushes you to deposit or promises returns.
Check your understanding
Your task
Search the register of your national financial regulator for a provider you have heard of before. Write down three lines: the full name, the registered office, and the supervising authority. If you cannot find it, write down what you will do next.
Sources and further reading
- The European Securities and Markets Authority (ESMA), together with national supervisors, operates public registers that let you verify an investment firm's MiFID II authorisation anywhere in the EU. View source ↗
Related
- Checking a providerFraud Protection
- If your broker goes bankruptStage 2
- Understanding the trading interfaceStage 2
- Matching questions for this stageQuestions