Ouch! Financial spread betting companies are getting hammered really hard today after the FCA proposed stricter rules for CFD trading.
CFDs, including spread bets and rolling spot foreign exchange products, are agreements between two parties to exchange the difference between the opening price and closing price of a contract.
London-listed spread betters plunged by around 30pc in early trade. They have since eased back but are still nursing hefty losses.
IG Group Holdings plc (LON:IGG) is down 24.5pc, CMC Markets Plc (LON:CMCX) has tanked 26.5pc and Plus500 Ltd (LON:PLUS) has lost a third of its value and is now on track for one of its worst days ever.
FCA has outlined the next steps spread betters should follow in its consultation paper:
Retail CFD policy proposals
1. Welcomes feedback on the policy measures we have proposed by 7 March 2017. Subject to these responses, the FCA will seek to publish a final policy statement and final Handbook rules by late spring 2017.
2. In the interim, the FCA expect all CFD providers to ensure they are complying with our existing rules for the provisions of services involving retail CFD products.
3. Expects firms to ensure they comply with current disclosure requirements. In particular, risk warnings should be clear and not diminished by other statements or their overall positioning and prominence,
4. Risk warnings ensure clients make informed decisions on whether or not to proceed with an investment.
Jake Green, regulation partner at law firm Ashurst, reckons today’s clampdown by the FCA on CFD trading will come as “a shock” to the UK industry. Already shares have plunged by more than 30pc following the announcement. According to The Telegraph, that’s what he shared on the matter:
This is less an example of ‘conduct regulation’, rather, ‘product intervention’, and this will come as a shock to the UK industry, which received detailed briefings from the FCA earlier in this year where this was not indicated.
The measures come hot on the heels of product and marketing bans in Europe. The leverage limits also trail those announced by CySEC earlier in the week and will therefore lead to certain providers exiting the industry and/or consolidation.
The industry may consider that the FCA’s position misunderstands the users/clients who utilise these services. Many do understand the risk (and are aware that many lose) – they do not compare the product to less riskier ones (tracker funds as an example) and moves to reduce the risk appears to miss the point of the product.
The FCA’s has this morning followed a move by the Cypriot regulator CySEC last week and taken a tough stance on spread betting products.
Over the medium to long-term, investment bank Liberum expects this to result in “a positive outcome”. It reckons the move by the City watchdog will “drive out some of the private and more unscrupulous operators”.
However, the bank added:
In the short to medium-term we will undoubtedly see a negative impact on growth and profitability.
Justin Bates of Liberum highlights the four major directives proposed by the FCA this morning:
1. Introduction of standard risk warnings and mandatory disclosures of profit-loss ratios on client accounts – The FCA notes that its research shows that 82pc of clients lost money.
2. Preventing providers from using bonus benefits to encourage account opening or trading activity;
3. Capping leverage at a max. of 1:25 for retail clients who have less than 12 months experience;
4. Capping leverage at a max. of 1:50 for all retail clients – CySEC proposals give clients the option to dial-up leverage from a default setting of 1:50 if they wish.
Mr Bates said:
We consider the last two points to potentially be the most damaging.
After the Cypriot regulator, the CySEC, issued new guidelines, Liberum placed IG’s recommendation and target price “under review” citing “the uncertain regulatory environment”.
Mr Bates now thinks downward revisions to forecasts look “inevitable” but in the absence of further information it is “difficult to call at the moment”.
However, he continued:
For the time being, our target price and recommendation remains under review.
So I hop over to Facebook, which tells me to SPREAD BET NOW. Not shy on promotion, these guys pic.twitter.com/hKROfqrWLR
— Katie Martin (@katie_martin_fx) December 6, 2016