7 points to consider in weighing up your Bank or FX Broker

Are you being served by your Bank or FX Broker?

Given the recent focus on transparency, it would be timely to review some issues in financial ethics within the FX market. Transactions aren’t always what they seem in the ultra-competitive spot and forward FX market. Businesses transacting with brokers/banks can (and often do) find themselves on the wrong side of the fairness debate. CFA Institute Code of Ethics and Standards of Professional Conduct go some way towards addressing these issues and represent global best practice to ensure conduct is ultimately in the best interest of the client.

A business looking to transact with a broker/bank should consider these seven points:

1. Best price and execution – Are brokers/banks minimising transaction costs and securing the best price for their client while ensuring fees are reasonable in relation to services tendered? Best execution refers to the efficiency of processes that allow clients to meet goals on a timely basis.
2. Duties to clients: Loyalty, prudence and care – Brokers/banks must always act for the benefit of the client and place clients’ interests before their own while also complying with any applicable fiduciary duty to clients.
3. Fair dealing & disclosure – Brokers/banks should not treat clients differently based on size, financial sophistication, type of business and strength of client relationships. Fairness does not mean equal treatment. Different fees may be charged based on different service levels but this should be disclosed at the outset to all clients.
4. Priority of transactions – client transactions should take priority over the broker/bank’s own dealings in currency markets.
5. Trading errors – In the event of a trading error, the broker/bank should correct the error and bear the costs of doing so. The client should not be disadvantaged or bear the costs implicitly (i.e. via an unfavourable currency spread).
6. Conflicts of interest – Brokers/banks should make full and fair disclosure of any matters that may interfere with their duties to clients. Bonuses or commission arrangements linked to turnover should be disclosed. Disclosure should be in plain language and allow clients to judge potential biases for themselves.
7. Excess trading – Implicit currency spreads and explicit fees should be reasonable. Brokers/banks should refrain from excessive trading to generate additional fees that are not warranted by the client’s objectives.

Businesses engaging in foreign currency transactions should be able to do so without paying uncompetitive fees to brokers/banks. In essence, Mayfair FX’s transparent platform is a good starting point for businesses seeking to avoid the seven issues highlighted above that ultimately lead to poor value.

Guest blog by Rajel Khambhaita, CFA

Rajel is an economist and Chartered Financial Analyst® trained in professional ethics.