The Importance of Regulating Online Brokers

One of the most notable features of the modern online trading and investment space is the presence of regulatory bodies.

Regulatory agencies across the world play an important role in regulating individual brokers, as well as the financial markets more broadly, with a view towards protecting investors from unlawful practices or abusive behaviour. And depending on the jurisdiction in question, these bodies have an important role in both drawing up and enforcing the rules and regulations that brokerages and other financial services organizations must abide by.

However, with this general introduction in mind, what are the broader benefits of having a tightly regulated financial services market? And, why is it so important for online brokers to be regulated?

Financial regulators in Canada

Canada’s financial services system is amongst the safest in the world. And thanks to their effective financial services sector policy, as well as active supervision and regulation, Canadian investors benefit from a range of protections.

However, there is no single entity or regulatory body that is responsible for overseeing this sector. Instead, Canada benefits from regulatory oversight by a range of different bodies and authorities. These include: the Office of the Superintendent of Financial Institutions; the Bank of Canada; the Minister for Finance for the Department of Finance Canada; the Canada Deposit Insurance Corporation; and the Financial Consumer Agency of Canada.

Alongside the Parliament of Canada and the Minister of Finance, these institutions have an important role in ensuring the proper functioning of the financial markets in Canada and the protection of investors—both institutional and retail.

Online brokers are overseen by the Investment Industry Regulatory Organization of Canada, which is a pan-Canadian regulatory organization that oversees investment dealers and trading activity in Canada. And, if you are one of the many millions of Canadians who have opened up an online trading account with a Canadian forex broker in recent years, you will directly benefit from their oversight!

However, looking beyond the specific Canadian institutions that are charged with protecting the financial markets and investors, what are the specific benefits that these organizations bring, and why are regulators so important?

Why are regulators important?

There are a number of reasons why it is very important to have fully functioning financial service regulators. Some of the most important reasons include:

  • Transparency: Brokerages are required by law to provide complete transparency to their clients. Regulators can oversee this and ensure complete transparency is upheld.
  • Safety of investment funds: Regulators put rules in place which ensure that investor funds and deposits benefit from certain levels of protection. This is particularly important if a broker goes bankrupt. It also ensures that client funds are only used for certain specific purposes that have been agreed upon.
  • Fraud protection: The authorization and licensing process, which is overseen by regulators, ensures that brokers refrain from engaging in illegal activities or activities that facilitate illegality.
  • Risk warnings: Regulators have an important role in publicizing trading and investment risk warnings. This is particularly important in any case where brokerages might overinflate the potential investment returns you can make with them. Risk warnings give any would-be investors the information that they need to make investment decisions.
  • Compliance: Regulators have an important role in making sure that brokers comply with all of the relevant laws and rules in a jurisdiction. This might encompass, for example, anti-money laundering or KYC processes.

What does the Investment Industry Regulatory Organization in Canada do?

With these benefits in mind, what do Canada’s financial regulators actually do? Here’s a high-level overview of some of its functions:

  • Produces rules and regulatory standards which must be adhered to.
  • Enforces any rules or regulatory standards.
  • Screens investment advisors and regulated firms to ensure that they are properly trained to provide certain financial services.
  • Conducts compliance reviews and ensures regulated firms meet minimum capital requirements to operate.
  • Conducts compliance checks to ensure trading procedures are in place and adhered to.
  • Undertakes market surveillance and trading review analyses.
  • Investigates market misconduct by regulated firms or authorized persons.
  • Receives referrals by concerned investors regarding marketplace activity.
  • Brings disciplinary proceedings in respect of individuals or firms that have breached relevant regulations. These may result in the issuance of penalties such as fines, bans, terminations, and suspensions.

As you can see, Canadian regulators play an important role in overseeing the functioning of the financial services market in Canada. This not only provides individual investors with high levels of protection, but also helps to instil investor confidence more generally. And, it is for this reason that Canada is such an attractive market for businesses.




About Joel Levy 2575 Articles
Editor-In-Chief at Toronto Guardian. Photographer and Writer for Toronto Guardian and Joel Levy Photography