British regulator bashes CFDs, yet allows £85 million of taxpayers money to fund potentially detrimental P2P lending sector

In the wake of the FCA’s proposals which seek to limit the way CFDs are provided in the UK by large, well capitalized and long established companies which are highly sophisticated and have a loyal client base, the potentially problematic P2P lending sector gets £85 million investment from the British taxpayer, despite FCA warning


The Financial Conduct Authority (FCA) in Britain finds itself at a crossroads in terms of priorities once again today, as barely a week has passed since the national financial markets regulator released a set of proposed rulings which seek to limit the method by which contracts for difference (CFDs) are provided by large, publicly listed, well capitalized and very stable OTC electronic trading firms, yet allows other unregulated and potentially problematic businesses to flourish.

On December 6, the FCA set forth a consultation paper proposing a package of measures intended to enhance consumer protection by limiting the risks of CFD products and ensuring that customers are better informed. The new measures 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 these 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.

This has caused a tremendous reduction in the share prices of three of Britain’s largest and most widely respected electronic trading firms, all of whom’s core business is retail market CFD trading via sophisticated proprietary platforms, and has, according to FinanceFeeds research, led to speculation that the large institutions and traditional exchange-listed derivatives venues with massive sway have been lobbying the regulators to attempt to create an environment in which acquisitions can take place and OTC derivatives products are revamped onto exchanges.

Today, just one week later, the FCA finds itself in a difficult position as the peer to peer lending industry – a particular sector which the FCA only recently deemed worthy of concerns around the growing complexity of the peer-to-peer market – has been the subject of an £85 million taxpayer funded round of investment.

On Friday last week, the FCA released initial findings of its review into crowdfunding, stating the following:

  • It’s difficult to compare platforms to each other;
  • Risks are hard to assess;
  • Financial promotions do not always meet requirements to be “clear, fair and not misleading;”
  • Increasingly complex structures are introducing new risks and conflicts of interest;
  • Provision funds, which platforms like RateSetter offer to cover a certain amount of investor losses, “introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors;”
  • Wind-down plans, put in place to take care of loans in case firms go bust, are not adequate;
  • Some platforms client money handling standards are not up to scratch.

On Friday this week, Francois Nembrini, Global Head of Sales & Liquidity Management at AFX Group’s QuanticAM, one of the FX industry’s senior figures who fully understands the institutional world having spent 12 years as Managing Director of FXCMPro, FXCM’s institutional division where he managed extensive relationships with banks, central banks, hedge funds, brokerages and investors globally, spoke to FinanceFeeds saying ““You need to be able to run a successful broker model based on service only or be a sophisticated market maker competing with dozens of other market makers on each leg of a trade.”

“I have seen a lot smart guys in the industry throw in the the towel in the past years and move into less regulated business like peer to peer lending when they realized the challenges ahead. I still believe there are great opportunities ahead in the OTC business but only if you are able to reinvent yourself and use your customer flow to create an exchange like model attracting both retail and institutions to your platform” said Mr. Nembrini.

The FCA’s report on peer to peer lending states “While we have identified some issues about the investment-based crowdfunding market, most of our attention at this time is on issues in relation to loan-based crowdfunding.”

Falling transparency and rising complexity among peer-to-peer lenders is a theme throughout the FCA’s 48-page report. The FCA writes at one point: “Firms’ desire to maintain confidence in platforms has occasionally led to firms acting in a nontransparent manner, masking true loan performance and exposing investors to risks.”

Indeed, despite this, state-owned British Business Bank (BBB) has £60 million invested on Funding Circle, £15 million invested on MarketInvoice, and £10 million on RateSetter, according to a Freedom of Information request seen by Business Insider.

Imagine a situation in which unregulated and unchecked aspects such as binary options scammers, online payment fraudsters such as PacNet or unlicensed OTC FX firms which do not transfer their trades to a live market and instead live from the losses of their clients would be funded by taxpayers to help them flourish in Britain, home to the world’s most sophisticated and well organized financial center. This may seem banal, however, despite the FCA’s draconian CFD proposals, the FCA considers PacNet still worthy of regulation as a payment processing provider even though it was sanctioned by the US Treasury and branded a criminal organization. Just one day after the US Treasury applied its sanctions, the FCA released a document in defense of PacNet, upholding its license.

The BBB began investing on Funding Circle and MarketInvoice in 2013 and RateSetter in 2014. It undertook extensive due diligence on each platform before committing the money. But FCA CEO Andrew Bailey told Business Insider in an interview last week: “It’s a fast-moving, evolving industry. Some of the directions in which it’s going off are posing some quite big challenges in terms of transparency and fairness.”

John O’Connell, Chief Executive of the TaxPayers’ Alliance, told Business Insider over email: “This is extremely concerning and taxpayers will want to know how this can be good use of their money.

“The wider question is why taxpayers are funding loans to begin with. There are answers to be found on how to increase lending from commercial banks, but the Government stepping in with a taxpayer-funded alternative should not be one of them.”

Thus, CFD firms must now find alternative and solid methods of complying with stringent new proposals, yet the peer to peer lending sector, despite FCA concerns, is bankrollable by the tax payer.

Infra dignitatem…..

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