Shares in some of the UK’s leading spread betting and contracts for difference (CFD) providers slumped on Monday after the European Securities and Markets Authority (ESMA) announced plans to improve investor protection for retail clients.
The independent EU authority said that it has been concerned about the provision of these speculative products for a “considerable period of time” and has conducted ongoing monitoring and supervisory convergence work in this area.
“Some competent authorities have also adopted national measures to limit the provision of these products to retail clients,” said the ESMA. “Notwithstanding these actions, ESMA remains concerned that the risks to investor protection are not sufficiently controlled or reduced.”
ESMA is considering the possible use of its product intervention powers under Article 40 of MiFIR to address these investor protection risks. In particular, it is considering measures to prohibit the marketing, distribution or sale to retail clients of binary options; and restricting the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex.
There are also a number of restrictions on CFDs currently under review which include leverage limits on the opening of a position between 30:1 and 5:1, a margin close-out rule, negative balance protection to provide a guaranteed limit on client losses, a restriction on benefits incentivising trading, and a standardised risk warning. ESMA will conduct a brief public consultation in January on this matter.
The UK’s Financial Conduct Authority (FCA) said that it supports ESMA in its consideration of potential EU-wide product intervention.
“Our domestic policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients is ongoing,” said the UK regulator. “Any permanent FCA policy measures would take in to account any prospective ESMA measures.”
The announcement has caused the share prices of some of the leading UK financial betting providers to slump earlier this morning, with significant declines across IG Group, Plus500 and CMC Markets.
IG Group believes that the leverage restrictions under review are “disproportionate” and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage.
“The danger of disproportionate leverage restrictions on regulated firms is the risk that they will push retail clients to trade CFDs with unregulated firms based outside the EU, potentially resulting in poor client outcomes,” the company said.
IG believes that any financial impact from the implementation of the prohibition on binary options and the restrictions on CFDs being considered by ESMA is unlikely to be significant in the current financial year.
CMC Markets said that while the proposed changes may have an impact on the group, it welcomes a consistent approach to regulation, a 'level playing field' and the raising of standards in the industry.
“The group's focus on attracting high value and experienced clients and its strong balance sheet, means that CMC is well positioned to take advantage of market opportunities that will arise from these proposals,” the company said.
Binary products generated £2.1m in revenue for CMC from the UK and Europe in H1 2018 and therefore any prohibition on the marketing of binary options to retail clients will be immaterial in a group context. Proposed margin changes are likely to have an impact on how clients trade, although CMC said that at this stage it was not possible to quantify the impact.
Plus500 also welcomed the statement from ESMA and reiterated that the company has never offered binary options and has always provided balance protection to its customers across all its product offerings in all markets.
"It is positive to have an update from ESMA, as this provides us with more transparency as to the regulatory changes that may be implemented in January 2018,” said Plus500 CEO Asaf Elimelech. “We look forward to working with our regulators through the consultation period and establishing detailed procedures to ensure the proposed measures operate effectively.
“Until those details are finalised, it is difficult to assess the impact upon our business, however, as we have previously stated, we have a flexible business model, already provide many of the protections suggested by ESMA, and are well diversified globally, now with seven licenses in different jurisdictions following the recent licence approval in Singapore earlier this month."
Shares in IG Group Holding plc (LSE:IGG) dropped 9.41 per cent to 664.00 pence per share in London early Monday, while shares in CMC Markets plc (LSE:CMC) fell by 13.11 per cent to 145.75 pence. Plus500 Ltd shares (LSE:PLUS) were down 12.81 per cent at 806.50 pence per share.