How FCA CFDs Restrictions is Impacting the UK Market?


The UK FCA has released an impact assessment regarding regulations that restrict CFDs products sold to retail customers. How much is the expected reduction of brokers’ profits with FCA CFDs restrictions

16 January, 2020 | AtoZ Markets – The FCA has proposed rules restricting how contracts for difference (CFDs) and CFD-like options could be sold to retail consumers. According to the FCA, companies have offered CFDs with higher financial leverage (gaining exposure to an asset by paying only a small part of its value). Therefore, a high percentage of these consumers are losing money.

Impact of FCA CFDs Restrictions on Brokerage Profits

Companies offering CFDs will see a reduction in profits of between £ 38.5M and £ 55.3M from 2019 to 2021. This range is based on information gathered from the review of two UK-based CFD companies before and after ESMA’s temporary measures.

The FCA pointed out that the two companies contributed 43 percent of the UK’s CFD market based on customer money. The UK regulator also said that the reduction in net profit (2019-2021) is close to an average of £17 million per year. This represents a 6.7 percent drop in net profit (around 6 percent for the first firm and 10 percent for the second study).

Moreover, the CFD rules introduced by the FCA specifies the following:

  • Limit leverage to a value between 30: 1 and 2: 1 depending on the volatility of the underlying asset,
  • Make negative balance protection mandatory and
  • Require a standardized risk warning, among other restrictions.

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FCA Cost-Benefit Analysis

Furthermore, the restrictions of the UK regulator go one step further than ESMA, as they apply to a wider range of products. In particular, CFD-like options fall under restrictions. Also, the leverage for CFDs that refer to certain government bonds has been limited.

The regulatory authority considered that there would be minimal on-going costs regarding negative balance protection and risk warnings. The FCA also said in its assessment:

“As a result, in our cost-benefit analysis, we explained that the current costs for businesses would be zero. Some companies suggested that there would be additional costs to display a risk warning. But we have not received any quantification of these costs. The net benefits of these measures far outweigh the expected costs. But, we do not believe it has proportionated to evaluate these costs.”

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