Forex trading is legal in the UK and is FCA regulated, but that doesn’t mean it’s free from risk – far from it.
What is Forex Trading?
Forex trading is short for ‘foreign exchange’ trading. It’s the process of trading in currencies, where people buy one currency and sell another with the aim of making a profit. With forex trading, you’re essentially betting on what you think will happen to each currency.
For example, if you think that the US Dollar will increase in value against Pound Sterling, you might buy US Dollars with the Pound, in the hopes that your prediction will prove true. If you’re correct, you can then sell your Dollars back for more Pounds than you originally bought them with.
High Risk
Forex trading is a high risk investment, as currency prices are very volatile and their values shoot up or down rather quickly.
Additionally, with forex trading, you can use something called leverage, wherein investors can borrow a certain amount of money from a broker to trade more than they actually have available themselves. So, you can put down a proportion of the full trade amount and the broker will cover the rest, allowing you to make bigger trades. This means that losses can be greatly magnified.
“While out margin requirements, closeout levels and real-time margin system are designed to limit your trading losses, you do risk incurring losses greater than your account balance, especially during periods of extreme market volatility.” –Forex
Forex Scams
Forex scams have become increasingly widespread, with unauthorised forex trading and brokerage firms offering opportunities to trade in foreign exchange, cryptoassets, and other commodities. These unregulated firms often falsely promise high returns and guaranteed profits.
Many people who have fallen victim to forex scams have reported to the FCA that they initially received some returns on their investments with these scam firms. These returns help these scammers solidify their position as legitimate firms, and gives the impression to victims that their trading has been, and will continue to be, a success.
This technique from scammers helps them to encourage victims to invest even more of their money into the scheme, as they are now more trusted to bring profits. At this point, the investor stops receiving returns, their account is suspended, and they are unable to get in contact with the firm.
Oftentimes, we are advised that if something seems too good to be true, it usually is, i.e, if an investment opportunity is offering guaranteed profit, or claims that it will make you rich quickly, it’s probably not a legitimate investment.
This is a good rule of thumb to follow. However, some scammers have become wise to this, and have adapted their techniques, with some making more realistic offers in order to make themselves seem more legitimate.
Additionally, you should check that they appear on the financial services register, and that the contact details and website information are the exact same as they appear on this register. The reason you should do this is because of the existence of clone firms.
Clone firms are a technique used by scammers, where they pose as a pre-existing, legitimate, FCA authorised firm. They may use the legitimate firm’s name, firm registration number, and address.
In the last quarter of 2023, the FCA issued 793 alerts about unauthorised firms and individuals, 6% of which were related to clone scams, showing that this is now a widely-used scamming technique.
32% of UK adults said being unable to pay the bills had made them anxious in the last two weeks
15% said job insecurity or unemployment made them feel anxious in the last two weeks
20% of UK adults said debt had made them feel anxious in the last two weeks
The Office of National Statistics also discovered adults who were behind on energy bills between 14thSeptember and 8thJanuary 2023 were more likely to report:
High levels of anxiety (49% compared to 33% of those not behind on energy bills)
Low life satisfaction
Low happiness
Feelings that things done in life are worthwhile
“There are clear links between financial strain and poor mental health and for people experiencing both they are faced with a double taboo. We don’t like to talk about money matters and the perceived stigma about mental health is stopping many of us from talking about our problems” – Mark Rowland, Chief Executive of the Mental Health Foundation
“It’s no surprise to see that the cost of living crisis has become a serious source of anxiety for many people across the UK, who are starting each day worried about how they’ll make their finances stretch. Talking about your mental health can be daunting at the best of times, but money problems can seriously compound those difficulties and can add another layer of shame that makes it harder to deal with”– Helen Undy, Chief Executive of the Money and Mental Health Policy Institute
Limiting Financial Stress
One thing that can significantly reduce financial stress is having a safety net of money in case your financial circumstances change, such as losing your job or your bills going up (as they always do!) This helps to reduce the pressure that comes from living payday to payday, worried you will get behind on any bills.
Of course, it should certainly be acknowledged that saving money can be a huge struggle for some people, especially those who have very little, if any, money left over at the end of the month to save, and also for individuals who were never taught how to budget or look after their money. For the latter, this is where meaningful financial education could really make a difference, and it is an enormous shame that this is not supplied properly in schools.
Sticking to a budget and keeping an eye on your bank statements and payslips can also help to reduce financial stress. Having a clear idea of where your money is going every month is essential if you need to find a way to reduce any spending and having a budget will help to establish what you are spending on and saving for. Sticking to a budget doesn’t mean you have to live miserably and never do anything fun. Rather, it means you can affordably set money aside for any of those meals out or shopping trips without worrying about overspending.
Debt is a huge cause of financial stress and anxiety, as can be seen from the Mental Health Foundation’s statistics. For those experiencing problem debt, getting help is imperative. Free debt advice can be found from any of the websites below, which is a great place to start:
I must stress the importance here of getting help, as burying your head in the sand and ignoring the bills as they come through will only serve to make the problem worse. You should not feel ashamed about being in debt, and you should not expect that it has to be like this forever, because it doesn’t if you work towards changing it.
Some key things to bear in mind to avoid creating or worsening debt are:
Avoiding payday loans, as their interest rates tend to be ridiculously high making it incredibly difficult to play catch up with what you owe. If you do choose to take out a payday loan, at least make sure that they are regulated by the FCA to avoid scammers
Avoiding Buy Now Pay Later Financing, as it encourages you overspending. A good rule of thumb is that if you can’t afford it right now, you can’t afford it at all
Paying more than the minimum repayment on your credit card. Try to pay your credit card in full and on time, every single time
Creating a debt repayment plan. One way of doing this is prioritising the debts with the highest interest rates first to slow down the growth of what you owe. See if one of those debt advice organisations mentioned above can help with this
Get talking! Tell a trusted friend, family member or colleague about your debt
Overall, financial stress is a huge source of pressure for UK adults. We need to ensure that we are having open and honest conversations about it to help reduce the stigma that comes with financial struggles and worries.
by Red Star Wealth
Due to the success of open banking, it’s likely that we will see the development of open finance in the near future.
Open Banking: A Success Story
Open banking involves granting a third party access to your bank account. With your consent, this third party can access your payment account data and ask your banking provider to make transactions on your behalf.
The October 2021 Open Banking Impact Report found that 55% of Open Banking consumers agreed these services had helped them reduce their fees and costs and that 83% were willing to expand their use of these kinds of services.
On the whole, open banking seems to have been largely successful, and this has now opened the door to expansion into open finance.
Open Banking to Open Finance
Both open banking and open finance operate on the idea that individuals should be in control over who can access and use their financial data.
Open finance is simply an extension of open banking; it would enable wider sharing of this consumer data to more financial products and services, rather than it being confined to banking. So, rather than this data sharing solely involving things like payments, under open finance, it would also be applied to things like investments, insurances and mortgages.
The FCA’s Definition of Open Finance
Encouraged by the success of open banking, the FCA, government, and financial services industry have been considering the potential benefits of open finance… but what exactly is it?
[Open finance] is based on the principle that financial services customers own and control both the data they supply and which is created on their behalf. Re-use of this data by other providers would take place in a safe and ethical environment with informed consumer consent. This would mean that a financial services customer who consents to a third party accessing their financial data, could be offered tailored products and services as a result. Access would be provided by that customer’s current financial services provider under a clear framework of consent
How Might this Work in Practice?
Open finance would work on the foundation already established by online banking. It would work in a similar way, through data sharing to third parties, but it would simply cover a wider breadth of circumstances by collaborating across various financial services. According to UK Finance, this could potentially, “reduce fraud, improve financial wellbeing, widen access to credit, deliver greater choice in payments and help enable reusable digital identities.”
So, let’s have a look at a few examples of how this may look in practice for its consumers…
With open banking, consumers can see all of their account balances on one singular dashboard. With open finance, more financial products could be incorporated, so that the consumer could see their ISA, pension, mortgage, investments, and so on, all in one place.
Open finance also allows for even more personalisation. One example of this is lenders being able to offer mortgages based on the customers’ exact needs. Their service to the consumer would be personally tailored to them as an individual through data analysis of their accounts and finances.
Whilst open banking allows its users to authorise third parties making payments on their behalf, open finance could go even further, allowing consumers to link automatic transfers between different financial products, such as establishing recurring payments to pay off their mortgage.
by Red Star Wealth
According to the Inclusion Foundation, around 1.3 million UK adults currently face financial exclusion, with 1 in 4 experiencing it at least once in their life.
What is Financial Inclusion?
Financial inclusion is when individuals have equal access and opportunity to financial products and services that meet their needs, regardless of their own background or income.
Therefore, working to create financial inclusion is an essential way in which we can work to create equality.
Financial Education
One vital step in creating financial inclusion is through financial education, as individuals need the skills and knowledge necessary to use financial products and services.
“In addition to building individuals’ skills and confidence, the government is working with partners to make financial communications easier to understand. HM Treasury have been working closely with Plain Numbers, an organisation that seeks to help regulated firms to better support their customers in understanding important communications.”
Whilst this is certainly positive progress, it is notable that they don’t actually say how they are building these skills and confidence. Perhaps we should be attempting to teach financial literacy at an adequate level throughout the education system so that children grow up to understand these financial products and services.
However, as stated by the FCA, “education alone is not enough. Sometimes, markets do not work well to produce good outcomes for consumers.”
Albeit a very important one, financial education is just one component in creating financial inclusion.
As noted by the FCA, we tend to need a current or checking account to be paid and to pay bills, yet by 2020, 1.2 million UK adults still had no current or e-money account.
They also found that many UK households were struggling to access credit, or struggling to access it at reasonable prices.
Many of those on lower incomes are unable to access financial advice, which can be an important tool for understanding, and dealing with, things like pensions, savings and investments.
They also found that 1 in 10 UK adults did not have access to an insurance product and that those in low-income households were less likely to be insured and more likely to face higher premiums if they did have insurance.
All of these things, combined with their finding that 1 in 5 UK adults have low financial capability, perfectly sum up the issues of financial exclusion.
Financial Inclusion Helps Economic Growth
According to a study conducted by Azimi, financial inclusion helps create inclusive growth. He found that whilst financial inclusion had more of a positive impact on economic growth for low-income countries, it still increased the economic growth of middle-income, upper-income, high-income, OECD and non-OECD countries.
From a social perspective, financial inclusion is vital if we want to work towards achieving equality. However, it also has positive economic effects as it helps to stimulate the economy and trigger growth.
by Red Star Wealth
According to Finder’s digital banking statistics, around 93% of Britons used online banking in 2022. The rise of digitalisation has certainly made it easier for us to manage our finances, but has it made it too easy?
Reviews and Regulatory Checks
One great impact of digitalisation is the ease of which we can now check the trustworthiness of financial advisers and firms which offer financial products or services.
It’s easy for us to check reviews and ratings online to see other people’s experiences with different businesses and individuals. Even more importantly, we can easily check whether advisers or firms are FCA or PRA regulated to ensure that we are properly protected when receiving financial products or services.
Online Banking
Online and mobile banking can enable us to manage our money easily at the click of a button. It allows us to see the exact numerical figure of what we have in our bank account and allows us to set up savings accounts with little hassle, encouraging saving and financial planning.
However, not all of the effects of digitalisation have been quite as positive…
Accessibility
Digitalisation has made it far easier for us to check our finances and make changes to them, such as making an online banking transfer in less than a minute.
In fact, according to Finder, 49% of those who opened or intended to open a digital bank account cited convenience as a driving factor, with 16% driven by a lack of branches in their area. But is ‘going digital’ a response to banks closing, or is it also a driving factor as it reduces the demand for their services?
The Rise of Cryptocurrency
Digitalisation has led to the boom of cryptocurrency in recent years. Depending on your viewpoint of cryptocurrency, this can either be seen as a more positive or more negative impact.
Whilst many now swear by cryptocurrency, it does offer us the opportunity to take on more risk when investing. This can of course reap high rewards but it can also lead to huge losses due to its volatile nature.
Online Loans
With digitalisation has come the emergence of online loans. It is relatively easy for us to apply for online loans with us now able to borrow money from the comfort of our own homes.
However, the ease of which we can now obtain loans might actually make managing money harder in the long run. This is because it encourages many people not to manage their finances at all, but to instead expect that they can rely on borrowing.
It’s arguably too easy to be accepted for payday loans online due to affordability checks which are often inadequate. This makes dealing with your finances harder in the long run as you will still have to deal with the original debt but with the addition of excessive interest rates.
Buy Now Pay Later
Buy Now Pay Later firms have made it too easy for us to overspend, as it encourages many people to think they can afford more than they actually can and spend without repercussions. However, there are of course significant repercussions of this.
Apple Pay, Contactless and Debit Cards
Apple Pay, contactless card payments and debit cards mean it’s now very easy for us to spend money. If paying solely with cash, you would have to ensure that you always had enough cash on your person, which is a double-edged sword.
It would mean you wouldn’t necessarily have enough money if you were in an emergency that required payment, e.g, running out of petrol. It would also mean you would always have to carry cash, sometimes in large quantities. Therefore, if you were to lose your purse or wallet, this money would be gone.
Having a debit card or a form of online payment means that we avoid both of these issues. With the latter, you could cancel or temporarily freeze your debit card if you were to lose it.
However, these forms of payments have perhaps made spending too easy. It is easy for us to spend money without really thinking about it leaving our account. For more information about how cash may be better for helping us budget, click here.
Overall, digitalisation has made dealing with our day-to-day finances much easier, but this isn’t always a positive thing…
by Red Star Wealth
Islamic finance continues to be a growing success story both in the UK and globally.
An Introduction to Islamic Finance
Institutional Islamic finance started to emerge in the 20th century and the Islamic financial sector continues to grow at high rates every year.
Islamic finance is a broad term, covering a range of products, services and firms, but it is essentially a way of managing money in a way which complies with the moral principles of Islam and Shariah law.
Anyone can use Islamic finance products and services, regardless of whether they themselves are Muslim.
This report found that Islamic finance experienced growth of 17% in 2021, reaching $4 trillion USD worth of assets.
This graph, taken from their report, shows the trend of growth for Islamic financial assets from 2015 to 2021, as well as projections of reaching $5.9 trillion USD by 2026.
The report also found that there are now 47 different countries with at least one type of Islamic finance regulation.
As we can see from its findings, Islamic finance is experiencing steady growth with no signs of stopping or slowing down.
Key Principles of Islamic Finance
Money should not have value in itself. Rather, it is a measure in which we can exchange goods and services which do have a value. As such, we should not make money off money itself, e.g, from interest
Prohibition of interest, whether nominal or excessive, fixed or floating, simple or compound. Wealth should only be created through legitimate trade and investment in assets
Islamic finance should not cause harm. Once again, we can apply the prohibition of interest here; interest on loans is disallowed because it is seen as an agreement which unfairly favours the lender, thus exploiting the borrower. As well as interest being prohibited, any kind of dealings with, or investment in, things that are deemed haraam, is also not allowed. This includes things like gambling, pornography, pork, tobacco and alcohol
Shariah compliant financial transactions are based on the essential maxim of sharing risks and rewards. Where possible, any risk or profit should be shared, whether between two people, an individual and a business, or two businesses
Shariah Boards
A Shariah Board certifies that Islamic financial products and services are Shariah complaint. Compliance with Shariah law forms the basis of Islamic finance, so many Islamic banks or companies that deal with Islamic finance will have their own Shariah board. These boards are usually comprised of Shariah scholars who are qualified to issue fatwas (religious rulings) on financial transactions.
However, the UK does not have a central authority to ensure Shariah compliance of financial products or services and there is no legal requirement for our Islamic financial institutions to have a Shariah supervisory board.
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) regulate Islamic financial institutions on a basis of “no obstacles, but no special favours.”
This means that in the UK, Islamic financial institutions are treated the same as other conventional firms so need the same kind of authorisations and permissions to carry out financial and business activities.
If an Islamic financial institution does have its own Shariah board, it should provide additional information to the FCA about this.
