FCA spread betting Regulation toughens: Consequences for CFD industry


FCA spread betting Regulation has been amended int he end of last year. The regulator has issued stricter rules. How did this impact CFD businesses in UK?

2 February, AtoZForex In December 2016, the UK financial regulator, Financial Conduct Authority (FCA) has proposed the new frameworks for the companies selling ‘contract for difference’ (CFD) products to retail customers. The initiative was an attempt to improve the standards across the industry and assure consumers’ adequate protection.

FCA spread betting Regulation change consequences

Now, when we have entered the second month of 2017, it is high time to look into the results of implemented changes. The Head of Chinese desk at AFX Group in London, Naomi Ewart-Simcock, has shared her views in regards to this topic. Reportedly, Ms. Ewart-Simcock believes that the news FCA rules are positive news, at least for STP brokers in the UK. Naomi Ewart-Simcock has stated:

“The Financial Conduct Authority (FCA) proposed stricter rules for firms selling ‘contract for difference’ (CFD) products to retail customers. Among the new rules, the maximum leverage will be limited by the FCA to no more than 50:1, has sent shockwaves through the sector. However, it might be good news for the brokers with the agency model, or those often called STP brokers.”

Moreover, earlier, Ms. Ewart-Simcock has stated that the firms in the UK with STP-only licenses that ”operate an agency model in terms of execution are ever more desirable”. In regards to the new CFD frameworks by FCA, she has indicated that the STP brokers are welcoming the changes. The reason being for such positive reaction is that the new rules are diminishing the operational risks of STP brokers’ running model.

Restricted leverage advantages

Talking about the pending leverage restrictions, Ms. Ewart-Simcock referred to the events of January 2015:

“In January 2015, the black swan event rocked the FX industry exposing FXCM to negative client balances and sending Alpari UK to liquidation over night. Such a volatile event definitely comes with liquidity issues and the leverage offered by the brokers will further thin the liquidity next to zero. Ultimately the biggest victims will be the brokers themselves.”

Following on this, while discussing the suggested 50x leverage cap, Ms. Ewart-Simcock outlined certain pluses of these restrictions. She has stated:

“New rules will certainly reduce STP brokers exposure. 50:1 leverage is still high enough to ‘speculate’ the market instead of ‘invest in’ the market.”

Also, she believes that new rules will bring the market rhythm and the possibility for analysis back. Now, Ms. Ewart-Simcock believes, there is a messy industry with so-called ‘casino banking’ entities.

FCA CFD Leverage cut IG stocks impact

IG Group is not the only institution to be adversely affected.  CMC markets suffered a 27% loss in share value while Plus 500 was down by 30%.  The FCA expressed concerns that more retail clients are trading CFD products that “they do not adequately understand”. They are therefore proposing measures to protect consumers including banning account opening bonuses or benefits to promote CFD products.

Following the statement by the FCA, IG issued a statement on their website stating that it will

“carefully consider the implications of the consultation paper and respond later. 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 also pointed out that the FCA’s proposals do not appear to directly apply to firms operating outside the UK.  These firms are offering CFDs and binaries to clients in the UK. This is done via the cross-border services passport route from another EU member state.

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