Currency Exchange Explained
As mentioned before, forward planning for exchanging currency, especially large amounts, can save you a significant sum of money. Since the UK is out of the Eurozone, currency exchange into euros is a necessity, and in this Currency guide we will look at the way Currency Brokers handle the business of exchanging money…
- Types of Contracts
- Negotiating the rate
- Fees and charges
- Opening an account
Regulation is the subject currency providers get the most questions on, and it is only natural that people are concerned about the safety of their money with all the news we have seen over the past decade. The good news for clients is that the regulatory framework is much more robust than ever before in the UK. All money transfer companies must go through several steps before they can deal with clients' money.
HM Revenue & Customs
You might know these people as the taxman, but that's not what they are here for in this instance! All currency providers must be registered with HMRC who ensure that the people running the business are fit and proper to do so and have the knowledge, training, skills and experience to perform their functions. This registration can be verified online with HMRC.
Financial Conduct Authority
Currency providers who provide payment services must also be registered with or authorised by the Financial Conduct Authority (FCA). They are there working alongside HMRC, but they are more interested in a firm's procedures. Before granting registration or authorisation, they will examine how the company does everything, and more importantly that they are treating their customers fairly throughout.
Small companies can be registered with the FCA, whereas larger ones will be authorised. The difference is largely to do with the size of the company, though there is one other difference when it comes to how they treat clients' money. Authorised companies must make sure that client funds are protected, whereas it is opt-in for registered ones. However, if the registered company does opt-in, they are subject to the same levels of protection as authorised ones. You can confirm their status on the FCA website.
As currency providers handle individuals' personal data, they should all be registered with the Information Commissioners Officer (ICO) to ensure that they have adequate systems and controls in place so that data is held securely and used correctly in accordance with relevant laws. In addition, there are several industry best-practice bodies that firms are likely to be a member of at least one, where they can work together for better standards.
Protecting Clients' Money
It is important to ensure that client money is safe at all times, and whilst there are layers of protection in place, you want to know that everything is secure. The Financial Services Compensation Scheme (FSCS) does not apply to any currency provider, so the £85,000 limit does not apply.
Authorised companies are required to protect clients' funds by either providing client money status (like when sending funds to a solicitor) or by purchasing an insurance policy to protect the full value if anything were to happen to the bank. Claiming on insurance policies is rarely quick, easy or stress-free, so thankfully the vast majority of currency providers operate the client money approach, and will often be able to show you a letter from their banking partners confirming this. For registered companies, the protection is optional, but once they opt in, they are subject to the same rules.
If you are considering using a company, please do find out what method they use to protect your money, and ask them to prove it. If they cannot, you may strongly consider using a different provider, no matter how highly they come recommended.
Types of contracts- what are your Options
When you start looking into your currency choices available, you will probably see four basic types of contract offered. These are Spots, Forwards, Limits and Stops, and all have a different purpose.
Spot contracts are the easiest, simplest, and most common form of currency exchange transaction. It is for when you want to exchange a sum of money 'on the spot' for immediate payment and delivery. You might contact your broker or use their app to place an order, you would send your funds to them, and tell them where to send your currency. You can have your funds sent to a bank account in your own name, or a third party like a lawyer, agent or tradesman. Spot contracts are normally settled within two working days, though this can be extended slightly if you need to move funds around before sending them to your broker. Spots can be used for most currency pairs, whether you are buying Euros from Sterling, or something far more exotic.
A Forward is where you agree to exchange currency, but not for immediate payment and delivery, but for a date in the future. A Forward contract is useful for people who might be purchasing houses, or have large, budgeted expenditure in the future. If I agreed a house purchase for €100,000, I would expect to pay around £86,000 for that at the current exchange rate, but what I do not know is how much it will cost in Pounds Sterling when the completion date arrives, because the exchange rate will have moved. A small move in the rate will affect the cost by hundreds or even thousands of Pounds.
A Forward contract helps us get around this problem by locking in the exchange rate at a pre- determined level, so you know that when you come to complete on a purchase in the future, you receive the same exchange rate as you would on the day the transaction was agreed. Forwards usually require a deposit of between 5% and 10% of the amount you wish to fix, and can be arranged for anything up to two years into the future, so you don't have to part with all your money before you need to. Remember – your rate will be locked whether it goes up or down during the term of the contract, it is not a tool to speculate on which way the rate will go, but to remove that possibility entirely.
Limit and Stop Loss Orders go together, and they may be familiar terms to anyone who has invested in stocks and shares. A Limit Order allows you to target a level slightly above the current market rate. If you are exchanging large sums, then even an increase of 1% can have a sizeable impact in your favour. Stop Losses cover you at the other end, should the market move adversely, you can place a "worst case scenario" to ensure you do not fall below your given level. Limits and Stop Losses can be used for either a Spot or a Forward contract, giving you maximum flexibility.
As with many things in life, it is important to consider counsel from a specialist and ensure you understand everything before committing to any course of action. Whilst currency brokers cannot usually offer advice, they should be able to explain the advantages and drawbacks of each solution, and how they might relate to your individual situation.
Opening an Account
Most currency providers will allow you to open an account with them free of charge. It's not like a bank account where you have to put money down, it's more of a facility to trade and execute transactions as and when you want to.
You will normally be able to register online or through an app, initially by submitting your details and agreeing to the terms and conditions of the provider. It is likely that they will ask you for some copies of proof of identity documents, and some more details on the why you need the service further down the line. They are legally obliged to find out this information by regulators, so it's not just them being nosey! If you are lucky enough to be buying a house or another large asset abroad, you may have to provide a copy of your purchase contract for example.
It is often asked when you should open your account, and for most house hunters, they will want to do it before they go on a viewing trip. If you see something you like, you can get on the phone to your currency specialist, find out where the rates are, what the trading signals are looking
like before you make an offer – just to make sure you don't get caught out by any sudden currency fluctuations.
Negotiating the rate
We all like to negotiate and feel like we're getting a good deal, and currency exchange is no exception. However, in the world of high finance, it is easy to overlook the important parts of any transaction and accidentally end up not getting the best deal.
The most fundamental way to compare is by looking how much you will get at the other end for the specific amount you are exchanging, and you might find that different brokers are better for different transactions. If you come across a broker that has highly competitive rates but also transaction charges, they might be great for large transfers where the rate is the crucial factor, but less attractive for smaller regular transfers where the charges are a more meaningful part. On the other side, you might find a broker with less competitive rates but no transfer fees is better on smaller transactions.
Most brokers will offer a "commission free" service, in that there is no fixed percentage that they will charge, however many will offer different rates to different clients depending on the transaction amount, and type of service provided. Don't be afraid to get a quote from more than one provider to ensure you are getting the best possible value for your requirements.
Fees and Charges
Currency providers are not charities, and will make a profit on your transaction, the same as any other business would – where a supermarket makes a margin on the products it sells, so does a currency provider, although it is sometimes a little hard to get our heads around the fact brokers make money on their product, which is also money. There are three main sources of income for brokers:
- Fixed percentage commissions. This is where a broker would charge a certain percentage of a transaction, for example 1% for providing the service. Commissions like these are very rare in the currency exchange business these days, but they are a clear and transparent way of operating.
- Transaction When your currency provider sends your funds on, they must use a bank or payment provider to do so, and they will be charged a fee for that. Whilst we might have to pay upwards of £30 for a bank to transfer our money, currency providers will get something of a discount, but they can easily be charged between £5 and £10, particularly when sending money abroad. On small transactions, they may ask you to cover this cost for them.
- Exchange rates. This is where currency providers make the bulk of their margin, and it is in the difference between the rate they buy at, and the rate they sell to clients at. This often varies from client to client, and depends on the transaction size, how often you do these transactions, and the amount of support you need from your currency If a client sends £100,000 to Euros every week, they might typically get a better exchange rate than another client who sends £2000 every three months to top up their bank account. The reason for this is simple – there are ongoing costs associated with having an account open that the provider will need to cover. Rather than charging ongoing account maintenance fees, they will often adjust the exchange rate provided at the point of use to ensure that the company remains profitable, and the client is only being charged when they use the service.
For this reason, whether you are sending £1000 or £100,000 across to France, the 'magic question' to ask is not what is the exchange rate or the charges, but "How much do I get at the other end for my funds."
Our currency guide has been brought to you by Matthew Harris, our independent currency expert.
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BIPS at a glance
|Online Transfers||Telephone Transfers||Regular Transfers|
|Minimum transfer size||£50||£10,000||£300 per month|
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|Fees and Charges|
|Bank transfer||✔||✔||Direct debit or standing order|
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