Shares in most leading spread betting firms have plummeted following new proposals from the Financial Conduct Authority (FCA) designed to protect retail consumers.
The UK FCA on Tuesday proposed a number of measures designed to tighten up regulation of the CFDs market. The Financial Conduct Authority tabled a package of measures to ‘limit the risks’ of these products, which it hopes will ‘enhance consumer protection’.
– Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts to illustrate the risks and historical performance of these products.
– Setting lower leverage limits for inexperienced clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25-to-1.
– Capping leverage at a maximum level of 50-to-1 for all retail clients and introducing lower leverage caps across different assets.
– Preventing firms from promoting CFD products by offering bonuses or benefits on new trading accounts.
Some levels of leverage presently offered to clients by some providers exceed 200:1, according to the review. The regulator said that contracts for differences, which include spreadbets and rolling spot foreign exchange products, are complex financial instruments and that, following an increase in the number of firms in the CFD market, it has concerns about the number of retail customers opening and trading spread betting style accounts, with 82% of customers losing money. The number of CFD providers has grown to 97 FCA-authorised providers compared to 2010 when there were approximately half this number yet the largest UK provider still controls 40% of the UK market with a further 6 firms taking another 30% while a number of smaller firms make up the remaining 30%. UK retail CFD providers currently hold around £3.5bn in client money.
As well as providers having an actual base in the United Kingdom, there are also about 130 providers registered to provide cross-border services into the UK under European Union passporting rules. Most of these firms are based in Cyprus. The UK providers also make use of the passporting rules with many having overseas branches in other EU countries. The Financial Conduct Authority estimated that UK providers serve about 400,000 individual active traders based outside the UK.
Traditionally, CFD products have been marketed to more sophisticated retail investors. However, with the emergence of recent entrants like Plus500, providers are increasingly targeting retail clients and the FCA has taken a stance that these products are unlikely to be suitable to ordinary investors and are being offered on terms that significantly increase the risks and probability of losses.
The FCA announcement prompted a major share selloff, with market leader IG Group falling more than 40% to 500p and rival CMC Markets dropping 35% to 115p.
CMC tried to downplay the impact of the proposed regularoty changes, stating that it already focused on higher-value experienced clients who understood the markets, rather than high-churn clients.
The providers stated in a note release: “CMC’s business model and ongoing strategy is focused on generating revenue from client trading costs and therefore believes in establishing long-term client relationships.” It added: “CMC recognises the FCA is endeavouring to ensure that any regulation is delivered in a balanced fashion and looks forward to working closely with the Financial Conduct Authority over the coming months.”
IG Group said in a statement: “The company believes in “robust and proportionate regulatory oversight” of the CFD sector in the UK and Europe and recognises that there are shortcomings in the approach to the marketing of [spread betting products] by certain firms, often operating from outside the UK. The Company has operated and will continue to operate to the highest standards in the industry, and its initial view is that certain of the FCA proposals could enhance client outcomes.
IG Group said it will now consider the implications of the FCA Consultation Paper and the courses of action open to it, with plans to respond in accordance with the deadline of March 7.
In response to the announcement, Plus500, said the topics covered by the FCA will have a “material operational and financial impact” on its UK subsidiary, which represents approximately 20% of group revenue.
Editor Note; Sooo… before we all completely lose our heads it’s worth saying that this FCA report is a consultation document and not a matter of fact and the regulatory body is unlikely to make a final decision until late 2017. This is not investing, it’s speculation and this is how it works. Successful traders won’t fail if they switch to spread betting, unsuccessful traders won’t succeed if they switch to direct access or buying the shares outright.
It is important to point out that risk is a factor of leverage AND volatility. 50:1 is quite high leverage on share CFDs but relatively low on a stable forex pair like AUD/USD. What really bugs me is that the FCA’s main argument is that most losers are from “Expected margin loss through automatic close out”. And then they are going to mince the leverage limits based on the lack of experienced retail clients. The only way these new morons are going to get any experience is to lose some more money. You can’t stop stupid. but a bit of education could go a long way.
Moreover, regulation may not entirely be a bad thing as more honerous rules are likely to encourage further industry consolidation, as new rules generally hit the smallest firms hardest. Without the high leverage, and the attraction of new money, the race to the bottom of spreads will also have to stop. Interestingly both IG and CMC point out that the majority of their profits come from ‘High Rollers’ (so called) who know exactly what they’re getting involved with when they play with leverage. The ‘know nothing’ Punter who is given 200 x leverage by Plus500 and their ilk and has his account closed before he can breathe is the target of the FCA’s regulation . This will be sorted out in the consultation process and I think we may find that this is a very small storm as far as the bigger players are concerned. It may well even strengthen their businesses as they pick up clients from the disreputable.
However, what really does seem interesting to me is that the shares of IG, CMC, Plus500 and Playtech were all trending sharply to the downside in the days preceding the FCA announcement (9% down between them in aggregate over 4 days before the announcement). It would appear that the FCA report was not so very secret after all.
Having said that I’m sure brokers in less regulated countries will be pleased with the news as in future international clients will probably prefer to trade in these jurisdictions.