Shares in stock market trading providers IG (IGG), CMC Markets (CMCX) and Plus500 (PLUS:AIM) have taken a 30% hit after the UK financial regulator threatened to impose new restrictions on how contract for difference (CFD) products work and the way they are marketed.
The proposals, if enacted, could have a severe negative impact on earnings in the sector.
The Financial Conduct Authority (FCA) is concerned that the rise in CFD providers in the UK has resulted in more retail customers trading financial markets via CFDs with many not really understanding how these products work.
WHAT ARE CFDS?
CFDs are derivative products that allow you to trade on live market price movements without owning the underlying instrument on which your contract is based. You can trade markets by paying just a small fraction of the total trade value.
This leverage effect means that investors can lose more money that they stake on a CFD trade, creating the risk that individuals could end up in debt.
The FCA wants to impose limits on the amount of leverage available on CFDs. It also wants to stop CFD providers from offering bonuses or benefits to lure in new customers.
This echoes a clamp down by authorities in Cyprus last week which caused a big sell-off in Plus500’s shares as it is a Cyprus-registered business.
WHAT THE PROVIDERS SAY
CMC Markets says it has consistently focused on ‘higher-value experienced premium clients who understand the markets and products they are trading’.
IG says it will continue to operate to the highest standards in the industry and believes that some of the FCA proposals could enhance client outcomes.
Plus500 claims the proposals will have a ‘material operational and financial impact’ on its UK business which represents about 20% of group revenue.
MAIN TWO THREATS
Investment bank Liberum believes there are two particularly ‘damaging’ areas of the FCA proposals for IG and its peer group.
Firstly, the FCA wants to impose a limit of 1:25 leverage for retail clients with less than 12 months’ experience.
Secondly, the regulator wants a cap of 1:50 for all clients. The FCA notes that some CFD providers offer leverage in excess of 1:200.
Liberum comments: ‘Over the medium to long-term we expect this to result in a positive outcome, i.e. driving out some of the private and more unscrupulous operators.'
'However, in the short to medium-term we will undoubtedly see a negative impact on growth and profitability.’
