UK plans tough clampdown on retail trading in complex derivatives

The UK financial regulator is planning permanent tougher rules on retail trading in contracts-for-difference, escalating its action against an industry it sees as trying to skirt regulation of complex products that can cause large losses for customers.

The Financial Conduct Authority on Friday said it would go further than European regulators and permanently restrict the sale and marketing of CFDs — derivatives that allow traders to track the price of an underlying asset such as gold or shares. It also plans to look at financial products that share the characteristics of CFDs.

“We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products,” said Christopher Woolard, executive director of strategy and competition at the FCA.

The FCA’s announcement further increases the pressure on the industry. Temporary European rules that came into force over the summer capped the amount customers can borrow to increase their bets. Marketing standards have also been raised and the sale to retail customers of another less popular type of derivative — binary options — has been banned. 

The UK will now make these measures permanent and the FCA will also consult on whether to target “closely substitutable products” such as “CFD-like options”, futures and “turbos”, a type of indexed debt product.

“This is to stop firms getting around these measures by offering retail consumers CFDs in slightly different legal forms,” the watchdog said.

The FCA also has concerns that cheap technology has opened the market up to new entrants, who use social media and celebrity endorsements to market their products.

The change in EU rules has already hit the profitability of London-listed groups such as IG Group, CMC Markets and Plus500, prompting senior departures and share price drops.

Earlier this year, IG said it hoped to offset the impact by developing products similar to CFDs, such as turbos, that had not been targeted by regulators.

“The FCA’s stamping on that — ‘Don’t even think about it’ — would be the interpretation of that,” said Paul McGinnis, analyst at Shore Capital. Turbos are also offered to retail clients by some European banks such as Société Générale and Commerzbank.

The FCA estimated the new CFD rules could reduce annual losses for retail consumers of UK firms by between £267.4m and £450.7m, while the binary options ban could save £17m a year. They should also reduce the risk of fraud by companies that claim to offer binary options but instead steal their customers’ money, the FCA said. 

The watchdog said it would relax the cap on borrowing for CFDs linked to certain government bonds. But it also said it would launch a consultation in early 2019 into a potential ban on the sale and marketing of cryptocurrency-based derivatives. 

Ben Williams, analyst at Liberum, said such a ban would be unwelcome to the industry, which made a lot of money from clients trading crypto-CFDs at the height of market fever in January. But the current market was now “tiny”, he added. 

IG Group said in a statement that the new proposals were “anticipated by the company, and do not change the company’s expectations on performance or group revenue”.

CMC Markets said it did not offer CFD substitute products, and that revenues from crypto-CFDs were “immaterial”, so the changes would “not have a material impact on the group”. 

Shares in CMC and IG rose 2.5 and 2.6 per cent respectively. However, shares in Plus500, which offers the widest range of crypto-CFDs, fell as much as 5 per cent in early trading before recovering to trade 1 per cent higher.

Plus500 said it was “already compliant” with the CFD and binary options rules and that crypto-CFD did not “represent a significant proportion of the company’s revenues”.