Regulation Made Simple- a Global Guide Part 1

This article was written by Adv. Nir Porat. and David Woliner. Nir Porat is the Co-Managing Partner at Ben Basat, Porat & Co., and is also responsible for leading the Corporate and International Law departments in the firm.

David Woliner is the Head of Financial Regulation at Ben Basat, Porat & Co Law Firm.

Today’s regulatory world can, in general and broad terms, be viewed as divided between offshore regulations, offering a relatively lenient licensing regime, and full regulatory regulations, offering a stricter licensing regime.

Offshore regulations typically offer a relatively fast licensing procedure (a few months, depending on the jurisdiction), along with reasonably low governmental fees and low costs of operation. One of the reasons for having relatively low costs of operation is that most jurisdictions do not require the physical presence of either offices, company directors or shareholders.

Due diligence / fit and proper requirements from the company, its directors and shareholders are, in most cases, straightforward.

Another reason is that compared to full regulatory regimes, offshore regulations require limited reporting duties of their licensees, mostly related to capital adequacy and financial statements. On the taxation side, most offshore regulations have little or no corporate income tax requirements. Additionally, most offshore regulations do not require that financial services be provided from within their territorial jurisdiction nor do they require such services to be provided solely to residents of their home jurisdictions. In terms of auditing requirements, most regulations are satisfied with the submission of financial statements on an annual basis (some require monthly and quarterly reports).

Full regulatory regimes, on the other hand, are much more demanding, which can be reflected in various manners: for instance, governmental fees (i.e. application fees, activation fees, and annual fees) are typically higher than in offshore regulations. The same is true with regard to minimum capital requirements. Fit and proper requirements from companies, directors and shareholders (and in some cases other functions) are lengthier. In many cases, a copy of your passport, your CV, copies of academic and professional qualifications and a copy of a recent utility bill will not be enough, and full regulatory regimes are likely to require a certificate of good standing, a certificate showing a clean criminal record, a certificate of non-bankruptcy and an updated tax return certificate. Physical presence consisting of an office and company officers is mandatory in most full regulatory regimes. In many cases, some of the required function holders need to be residents of the local jurisdiction. As to reporting duties, these typically go beyond the realm of financial statements and minimum capital requirements. Reports concerning Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term, compliance and anti-money laundering and other specific reports, depending on the regulation can be expected. On the taxation side, corporate income tax will vary from one jurisdiction to the other, but will in any event be higher than tax rates in offshore jurisdictions.

Offshore regulations include jurisdictions like Belize and Seychelles, recently joined by the attractive regulation of Vanuatu. Full regulatory regimes include some EU member states, the US, Australia and Hong Kong, which were recently joined by Israel and Russia.

It should be noted that in certain jurisdictions, companies which offer financial trading in forex and binary online services are currently not required to obtain a local license to operate such a business.

Offshore Regulations

Belize

The regulator in Belize is the International Financial Services Commission (IFSC). The relevant license is a license allowing for the “trading in financial and commodity based derivative instruments and other securities” (a rather broad definition which includes forex instruments and binary options). The IFSC typically reviews an application within 3-4 months from the date of its submission. The capital requirement from a typical forex and binary provider holding the above mentioned license is set at 100,000$ with annual fees of 5,000$.

On the taxation side, most offshore regulations have little or no corporate income tax requirements.

As to office requirements, there are several points to bear in mind - no physical office or employee is required to be resident and no corporate entities are allowed unless they were granted an exemption from the IFSC. At least one person has to be appointed to each of the following – director, secretary and shareholder. One of these persons should have experience in the field of the applied license (in that case forex and / or binary options trading), although no formal certification is required.

As to regulatory requirements, these are the main points - capital requirements are to remain blocked in a Belizean bank for the entire duration of the license. Also, a license holder cannot transact in Belizean currency. Written approval from the IFSC is required in order to hold client funds, which are to be segregated from the company’s funds and held in a separate bank account. License holders are obliged to meet with the IFSC at least once a year to review the performance of the preceding year and discuss the prospects of the ensuing year. Every licensed company must file monthly, quarterly and annual reports, mostly concerning capital requirements, margin requirements, income statements, details about executed trades and any other information required by the IFSC.

In terms of accounting and audit – there is an obligation to upkeep proper accounting records following internationally acceptable accounting standards (IFRS). There is no obligation to conduct audit for these types of licensees. Also, there are no tax obligations on the company’s funds which were generated outside of Belize.

Seychelles

In Seychelles, the relevant authority is the Financial Services Authority (FSA). The relevant type of license is entitled Securities Dealer, allowing the licensee to offer a broad range of financial instruments (including shares, stocks, bonds, swaps, options futures and CFDs). The capital requirement for the above mentioned license is set at $50,000, with annual fees of $2,500.

It should be noted that in certain jurisdictions, companies which offer financial trading in forex and binary online services are currently not required to obtain a local license to operate such a business.

Notable points regarding office requirements – a physical office and employees may be required to be resident. A licensee must employ at least two natural persons as directors. A licensee must employ at least one licensed securities advisor representative or one licensed investment advisor representative. Each licensee must hold professional indemnity insurance. Every company officer must satisfy fit and proper requirements. Also, a licensed securities dealer must maintain a register of the securities in which he has an interest.

As to regulatory requirements – no minimum Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term requirement (which can be met by either cash or other types of assets) but the company should always have assets exceeding the minimum paid up capital ($50,000). Every licensee has the obligation to notify the FSA in case of material corporate changes such as appointment or removal of directors or officers, any disciplinary action taken against the company and any change which causes the licensee to cease its business. There is an obligation to segregate clients’ funds in a separate bank account, and they are to be transferred to this account immediately following deposit by the client. A licensee must keep accounts of all amounts paid into and withdrawn from the client bank account.

The authority may impose conditions on a license, which may include any of the following: limiting the nature and scope of the business carried on by the licensee, including the type of securities he may offer, specifying whether the licensee may hold clients’ funds, or requiring the licensee to acquire and maintain membership with a recognized overseas securities exchange.

With respect to accounting and audit requirements – all licensees are under the obligation to upkeep proper accounting records following internationally acceptable accounting standards (IFRS). All licensees must appoint an auditor within 30 days of becoming licensed. Foreign auditors need to be authorized by the FSA.

Vanuatu

In Vanuatu, the regulating and supervising body for all financial licenses is the Vanuatu Financial Services Commission (“VFSC”), where you can apply for a license allowing for trading in financial and commodity-based derivative instruments and other securities. Licenses can be granted in 2-3 months. The capital requirement is set at $2,000 only. No physical presence is required. The application consists of a two page form. Vanuatu offers a variety of tax benefits, as the nation has no income tax, no capital gains tax nor inheritance tax.

Read part 2 here.