CFD platforms get a bloody nose from FCA

IG Group (LSE: IGG), CMC (LSE: CMCX) and PLUS 500 (LSE: PLUS) all took a beating in the market this morning following a shot across the bows from the FCA. IGG and CMC were both down c.25% and PLUS down over 30% in early trading.

What did the FCA announce?

The FCA has put out a proposal for stricter rules on CFD trading, a huge market these days, highlighting concerns that retail investors need to be adequately protected.

"Following an increase in the number of firms in the CFD market, the FCA has concerns that more retail customers are opening and trading CFD products that they do not adequately understand. The FCA's analysis of a representative sample of client accounts for CFD firms found that 82% of clients lost money on these products."

The proposals include:

• Standardised risk warnings and mandatory disclosure of profit-loss ratios,

• A maximum leverage of 25:1 for inexperienced retail clients,

• Capping leverage at a maximum level of 50:1 for all retail clients,

• Stopping account opening bonuses used to promote CFD products

Investors will need to take a view on whether the 25% and 30% drops in share prices are an overreaction or not. For my part, I must disclose I hold shares in PLUS. While writing this, the relative share price drops have actually swapped round, but all are still down 27-29%.

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UPDATE, 12:15pm

Comments from CMC, PLUS500, and IG

IG

IG Group, the largest CFD player in the UK with an estimated 40% share of the market, welcomed today's announcement, saying robust and proportionate oversight of the sector was required, and that it recognized the shortcomings in the approach to the marketing of CFDs

"The Company recognises that there are shortcomings in the approach to the marketing of CFDs and binaries by certain firms, often operating from outside the UK.

 

...[IG] has operated and will continue to operate to the highest standards in the industry, and its initial view is that certain of the FCA proposals could enhance client outcomes.

The Company goes on to say that it notes the FCA's proposals did not appear to directly apply to firms operating from outside the UK, to which it attributes much of the blame:

"... 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...

IG will carefully consider the implications of the FCA Consultation Paper and the courses of action open to it, and will respond in accordance with the timeline provided of 7 March 2017."

PLUS500

The Israeli CFD platform was initially hit with the biggest share drop, down 38% at one point, but has since rallied to just 25% down on yesterday's close. It also welcomed increased regulation, and said that it expected a "material" hit to UK revenues, which accounts for roughly 20% of its overall total:

"The Company believes that the topics covered in the note will have a material operational and financial impact on the UK regulated subsidiary which represents approximately 20% of the Groups revenues." 

CMC Markets

CMC Markets also commented on the FCA's announcement, saying it shared the common desire to see a "uniform application of the highest standards" to the industry:

"In its consultation paper, numbered CP16/40, the FCA has identified the risks to inexperienced retail investors posed by firms with a business model predicated on high churn of clients with a high loss rate. CMC has consistently focused on higher-value experienced premium clients who understand the markets and products they are trading.

Much like IG Group, CMC targets higher value, more experienced clients, seeking to educate and inform of risks:

Furthermore, an integral part of CMC's "client first" proposition over the last five years is ongoing client education about markets, products and associated risks. CMC's business model and ongoing strategy is focused on generating revenue from client trading costs and therefore believes in establishing long-term client relationships."