The UK financial regulator is planning to clamp down on the sale by spread betting companies of contracts for difference (CFD) and binary bet products to less experienced traders, including limiting leverage and preventing companies from attracting customers with special bonus introductory offers.
After finding that 82% of clients lost money through use of CFDs, the Financial Conduct Authority on Tuesday laid out a range of stricter rules for firms selling these products to retail customers to ensure consumers are better protected across the industry.
In light of these high rate of losses, the watchdog said it had concerns that CFDs, a complex form of spread bet and rolling spot foreign exchange
product often offered through online platforms, were being opened by retail customers who do not adequately understand them.
The FCA also said its research had revealed binary bets are "not transparent enough for investors to adequately value them, and have product features which are more akin to gambling products than investments", while Christopher Woolard, the FCA's executive director of strategy and competition, questioned "whether binary bets meet a genuine investment need".
He said the lack of adequate understanding of the risks involved in CFDs and binary bets often resulted in investors incurring "rapid, large and unexpected" losses.
Shares in IG Group, CMC Markets, which recently completed a binary product launch, and Plus500 plunged by more than 25% in early trading on Tuesday, while others with CFD and binary product offerings such as London Capital Group and Playtech seeing more measured responses from investors.
Last week the Cypriot regulator CySEC, which oversees a large number of spread betting operators who use the passporting rights conveyed by this license to trade in the EU, moved to restrict leverage and bonuses.
This adds to what a rising wave of regulation in the industry, said analyst Jonathan Goslin at Numis, with France planning to ban all digital advertising of CFDs, Belgium having banned CFD trading, the Netherlands exploring whether it will follow France and ban the advertising of CFDs, while Germany has said it could "intervene" shortly.
The new measures proposed by the FCA include:
· Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of products.
· Setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1.
· Capping leverage at a maximum level of 50:1 for all retail clients and introducing lower leverage caps across different assets according to their risks. Some levels of leverage currently offered to retail customers exceed 200:1.
· Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products.
The FCA's consultation on the proposals will end on 7 March next year, with the timeline on implementation to be clarified soon after.
In a statement released mid-morning on Tuesday, IG acknowledged there were shortcomings in the approach to the marketing of CFDs and binaries "by certain firms, often operating from outside the UK" and stressed its own "highest standards in the industry", saying its initial view was that certain of the FCA proposals "could enhance client outcomes".
It noted, however, "that the FCA's proposals do not appear to directly apply to firms operating from outside the UK offering CFDs and binaries to clients in the UK on a cross-border services passport from another EU member state".
Plus500 said it believed the topics covered in the FCA's note "will have a material operational and financial impact on the UK regulated subsidiary which represents approximately 20% of the group's revenues".
Analyst Paul McGinnis at broker Shore Capital pointed out that IG and CMC "typically operate at the higher end of the market in terms of average revenue per client - implying clients with greater understanding of the products - and would therefore be less impacted in relative terms. However, the rapid growth seen in leveraged trading in recent years has clearly got onto the radar of regulators which may moderate the growth in new clients going forward."
A note from RBC Capital Markets said the news "is negative - period" and that even though CMC and IG operate to the highest standards they are collateral damage.
"We do not believe that they are the intended targets, but will be negatively impacted nonetheless. While the quantum of the impact is very difficult to determine, we believe the companies will experience share price reactions as a result of souring sentiment, derating and a likely negative impact to forecasted growth," RBC said.
Numis's Goslin puts his rating on IG under review and downgraded CMC to a 'sell' rating due, noting that binary bets were one of CMC's key growth areas.
He said he believed the majority of the regulation being discussed or implemented has been targeted at the lower quality end of the market "i.e. Plus500 and below", which was "long overdue" but was "likely to have a material impact, at least in the near to medium-term, on CMC's growth and profitability across the UK and Europe".
On IG, he said: "Most of IG's customers are experienced and most do not utilise the maximum leverage currently available to them. It should however increase a customer's trading life span which will support longer term revenue growth."