Although there is no formal regulatory authority overseeing the Loco London bullion trading within mainland China, China-based investors can still trade legally through overseas organization acting as intermediaries. This carries a potential risk for investors as there is no client protection in the event of fraudulent activities, which may occur if a company “acts” as a legitimate broker.

As such, the first choice for Chinese investors investing in Loco London bullion should be to choose a broker based in Hong Kong.

Hong Kong is politically stable and possesses a highly mature financial and legislative framework for investors to participate in a wide range of investment products, including Loco London bullion.

Overseeing the Hong Kong bullion market, the Chinese Gold and Silver Exchange Society (CGSE) is the only government approved regulatory authority to approve any company who wishes to participate as a bullion broker. With an operating history of over 100 years, The CGSE aims to offer a transparent and accountable bullion market.

On the CGSE official website, www.cgse.com.hk, an investor can view important information on each of its member companies. This information includes the company license number, license type, website link and the names of the responsible managers and officers at that company. Whenever a company registers and is successfully approved by the CGSE, the manager is held personally accountable to the CGSE.

An investor can also refer to their CGSE transaction code whenever they participate through a member broker of the CGSE. This allows orders that have been approved are executed in a fair and accountable framework to allow investors peace of mind.

Points to note when distinguishing LLG companies in Hong Kong

1. Authenticity

Some companies based in Hong Kong may in fact be an offshore representative of a larger multinational corporation, which may not be disclosed on the customer brochure or website. If the client enquires to a company representative for further information, the customer agent may ask the client to contact over the telephone. In this event, the client may have no means to record the information being given, creating plausible deniability.

Whenever a client is introduced to a broker, the best practice is for the client to research and gather as much information about the broker. This allows the client to make a more informed decision to the compatibility of the broker in favour of the client’s needs.

2. Qualifications and industry awards

There is a wide variety of industry awards and qualifications that a broker may claim to possess. Some of these awards and qualifications may be given by Chinese based organisations with unofficial affiliations with the awarded company. Clients should be aware of this when assessing various companies, such that industry awards that have been given to different companies over a multi-year period have a stronger merit than newer award given by an unknown organisation.

3. Photographic quality

Related to the previous point, whenever a broker claims to have been awarded an international award, the client may request the customer representative for photographic proof of the claim. Some companies may send a blurry low resolution photograph to the client. In this situation, the client should be very careful when doing business with this type of company.

4. RMB settlements is like wagering on financial indicators

Although domestic investors in China feel more comfortable having their investments settled in RMB, there is something you need to know -- in the gold trading market, transactions cannot be settled in RMB because it is not a global currency, after all gold is priced in US dollars.

You should be aware that companies that handle transactions in US dollars are generally more reliable. Since many investors inside China do not directly hold US currency, then one can certainly make payments in RMB, and then the payment platform converts the RMB to US dollars. The currency that the company eventually receives will also be in US dollars.

5. Company name sounds similar to authentic brokers

If a real authenticated CGSE group member is of the name “Gold Investment Limited”, a scrupulous second company may mimic the authenticated broker by opting with the name “Gold Investment (Asia) Limited”. This type of activity aims to confused investors by diverting client funds from an authenticated company to an unregulated company. In these cases, clients should review the CGSE website to access the approved list of CGSE group members.

Below is a link of the member list page on the CGSE official site: http://www.cgse.com.hk/cn/member_03.php

6. False information

Some investors are not familiar with the intricacies of Loco London bullion or general investment practices. As such, some companies may take advantage of this lack of knowledge and the company may provide inaccurate information that may mislead the investor. An example of this unethical behavior is providing information that may lead the investor to believe that their bullion deposit is guaranteed against the Hong Kong government.

There are some companies that may claim to be partners or in association with international exchanges, such as LIFFE or LME. To be a partner with an exchange centre, the partner must either be a government institution or another exchange centre.

There are some companies which claim they are regulated by the Hong Kong Monetary Authority. The HKMA is only responsible for the macroeconomic issues involving with the Hong Kong economy, such as determining the exchange rate between the Hong Kong Dollar and the US Dollar. The HKMA is not responsible for regulating companies. That responsibility falls on behalf of the Securities and Futures Commission. The Chinese Gold and Silver Exchange Society (CGSE) is responsible for regulating companies involved in trading of gold and silver bullion.

All in all, an investor should be aware of the points highlighted above when dealing with a broker and, as such, we hope we have provided an informative framework for investors to make a more informed decision. If you have any further inquiries, feel free to contact our customer service team with any questions you may have.

7. Disparaging the Chinese Gold and Silver Exchange Society

There are some unqualified companies that are not licensed members of the Chinese Gold and Silver Exchange Society (CGSE). When asked by the investors if they have a legitimate license issued by the CGSE, they would go to great lengths to defame the CGSE, claiming that the license is not essential, nor is it necessary. There are two different excuses that these companies often use. First, they will say there is no law that expressly forbids companies which are not licensed member of the CGSE to trade gold. They are likened to an accountant who has never taken a CPA examination, yet after been given the opportunity to provide audit services, then later said that the law does not say a person has to take a CPA examination before he or she can engage in the practice of accounting. Likewise, a person that calls himself an actuary when he has neither qualification nor has he gone through any actuarial exams. Although there is no law that says you have to take the actuarial exam before you can become an actuary, any people of normal intelligence; however, know to avoid these unqualified people and look for the actuarial certified qualifiers.

Their second excuse is "the CGSE is a non-governmental organization," of which the top governing body is made up of its own members. If a person is not one of their own, the person cannot get elected. At first glance, the excuse appeares reasonable. But the fact of the matter is these people who are not familiar with international markets will be easily hoodwinked.

Of the world's leading derivatives exchanges, such as the Commodity Exchange, Inc. (COMEX), the Chicago Mercantile Exchange (CME), the London International Financial Futures and Options Exchange (LIFFE), the Eurex Exchange (EUREX), and the Hong Kong Exchanges and Clearing Limited (HKEx), none of them are government agencies and neither do they issue any laws. They are, as the unqualified companies would be eager to note, non-governmental agencies. However, these exchanges have much greater influence and are much more capable of winning the trust of the public than are the government agencies themselves, not to mention all these world-famous stock exchanges are also managed by their own members.

By and large, the domestic investors from the Chinese Mainland have a sustainable impression that the self regulatory ability of non-governmental agencies is weak. However, they did not realize the things outside are an entirely different story, in that every one of the world's major stock exchanges are themselves self-regulatory non-governmental organizations, yet they are under stricter constraints in the use of self-regulation than the governmental agencies.

After reading this, investors may think it is too much trouble to find out if a company is a good company or not. But if the investor is thinking of putting real money into an investment, why not spend a little more effort to learn more about the company. If not, he may never realize he has been cheated until it is too late.