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4 Key Ways To Protect Yourself When Using A Currency Exchange Service
Deborah Benn
Company collapses are no laughing matter – as the 13,000 clients of Crown Currency Exchange can sadly testify. This financial services company closed its doors in October 2010, taking with it an estimated £20 million of clients' cash – and the worst news of all is those 13,000 savers stand little chance of ever seeing any of their money back.
Why? The reason is that foreign exchange transactions are rarely covered by any compensation scheme.
While Crown Currency Exchange was a UK-based firm, it was popular with expats and overseas home owners and its collapse highlights the lack of regulation applied to currency exchange firms worldwide. There are, of course, many reputable currency exchange firms out there and by doing your homework and asking the right questions, expats can ensure they stay safe when using a currency exchange service.
Here are four key ways that you can protect yourself when using a currency exchange service:
Do They Have A Good Reputation? Use currency exchange services firms that have got a good reputation and are major players in the market. Further questions to ask should include: Who are their financial partners? Who do they conduct services for? Do they bank with reputable and financially stable institutions? Is the firm itself financially stable? How efficient is its payment and settlement service? What about online security?
Check The Firm's Regulatory Status. You should check with the regulator in the country where you are based, as well as the firm's original home country. Do not just accept a regulatory logo on the website or correspondence, as some countries operate different levels of regulation depending on the firm's size. For example, Crown Currency Exchange had a UK Financial Services Authority (FSA) logo on its site, but as a small currency exchange firm it was not fully authorised, it was only registered with the FSA. This meant it was under no obligation to keep clients' money in a separate account and the firm was subject to much lighter regulation generally.
Is Your Money Ring-Fenced? This is an important point bearing in mind the lack of standardised regulation covering currency exchange firms. Those firms that do hold clients' money in a separate account mean they, and the bank where the account is held, are not allowed to touch this money for their own purposes. In theory, this means that your money is protected and should be returned if the firm folds.
Check On Compensation Rights. Irrespective of whether or not the firm is regulated, ask whether the product or service you are using is covered by any compensation scheme if the firm collapses. In the UK, for example, most currency firms are authorised by the FSA as Payment Services Firms, which means they are not covered under the Compensation Scheme. Some larger currency firms are fully authorised by the FSA as financial services firms, which means that certain products such as currency option contracts are covered under the Compensation Scheme, but foreign exchange transactions are excluded.
Finally, it is worth mentioning Pre-Paid Currency Cards, which have become very popular with expats. Many of these are issued by currency exchange firms in conjunction with major banks. However, it is worth checking on what protection you have if the currency exchange firm or bank issuing the card goes under. For example, in the United Kingdom, pre-paid currency cards are considered e-money products and are excluded from the FSA's Compensation Scheme. It is therefore extremely important to check that monies held on your card are ring-fenced, that is, kept in a separate account. |
