Regulators confirm crackdown on CFDs, forex and spread bets

European and UK financial regulators have confirmed new restrictions on brokers, including IG Group, CMC Markets and Plus500, from marketing, distribution or selling binary options and spot forex trading and financial spread bets.

Having warned of the measures in December, the European Securities and Markets Authority on Monday said it will prohibit the marketing, distribution or sale of binary options to retail clients and restrict the provision of contracts for difference (CFDs) in order to protect retail investors from what are seen as highly complex financial products.

The measures are temporary but are likely to be renewed and there will be a consultation over making them permanent, the UK's Financial Conduct Authority said, having found that 76% of retail customers who bought CFD products lost money.

Restrictions on CFDs will also include rolling spot forex and financial spread bets, with CFD leverage on the opening of a position to be limited to between 30:1 and 2:1, depending on the price volatility of the underlying asset. In December, ESMA had suggested limits between 30:1 and 5:1.

The leverage caps will be 30:1 for major currency pairs, 20:1 for non-major currency pairs, gold and major indices, 10:1 for commodities other than gold and non-major equity indices, 5:1 for individual equities and other reference values and 2:1 for cryptocurrencies.

CFDs will also have a 50% margin close-out rule applied on a per account basis, which will standardise the percentage of margin at 50% of at which providers are required to close out one or more retail client’s open CFD positions.

A negative balance protection will aim to limit a retail clients’ liability to the funds in their CFD trading account.

Firms will also be prohibited from offering monetary and non-monetary benefits -- excluding research and information tools -- to retail investors; and all firm will need to give a standardised risk warning, including firm-specific figures on the percentage of client accounts that have lost money trading CFDs.

The regulator will publish an official notice on its website in coming weeks, giving firms one month to implement the prohibition on binary options and two months for the restrictions on CFDs.

Product intervention measures will have an initial duration of up to three months, ESMA said, after which the measures may be renewed, with the FCA saying

The UK's Financial Conduct Authority said it expects to consult on whether to apply these measures on a permanent basis to firms offering CFDs and binary options to retail clients.

In January, the UK regulator warned that many City brokers providing CFDs to retail investors were causing "serious concern" and said it saw a "high risk" that many firms were not meeting its rules and expectations in providing and distributing CFDs, indicating a "serious risk of harm" for consumers.

Over a 12-month review, the FCA found 76% of retail customers who bought CFD products on either an advisory or discretionary basis lost money.

IG said on Tuesday that it was "disappointed that ESMA has chosen to proceed with its proposal to impose disproportionate leverage restrictions which will unduly restrict consumer choice, and risk pushing retail clients to providers based outside of the EU or to use other products which allow the leverage clients seek. This may result in poor client outcomes."

The FTSE 250 company said it expects revenue in its 2019 financial year will be lower than that expected this year, primarily reflecting the impact of the regulatory changes in the UK and EU. "Demand for the products and services offered by IG is strong, and growing and the company expects to return to growth after FY19."

Numis, which is house broker for IG, said on Tuesday that ESMA's update was in line with previous guidance and the analysts expect EU countries to impose rules to cover the ESMA requirements.

"If they fail to do this ESMA has the ability to intervene to achieve their desired objectives."

As the CFD industry matures and regulation is introduced to restrict the activities of the less scrupulous providers, Numis believe IG's market position should improve.

"We see this enhancing the quality of the group's income and believe its best in class practice will ensure that it is less negatively impacted from regulatory change. We expect the number of providers to shrink, as many of IG's smaller competitors are already struggling to break even. IG have guided that they expect the ESMA measures to reduce revenues by less than 10% and we have already included this in our forecasts."