FCA rulings on CFDs lambasted – “Lowering the leverage won’t save clients from losses” says regulatory technology expert Quinn Perrott
After the FCA announced its plans to reform the CFD market, shares of major electronic trading companies in Britain plummeted. The question is, will the new rulings actually serve customers any better? There is a school of thought that thinks not
Yesterday, Britain’s Financial Conduct Authority (FCA) released a consultation paper which stated the proposed new rulings by which electronic brokerages which offer contracts for difference (CFDs) will have to abide by.
The proposed rules created a massive stir as the FCA set its sights on restricting and changing the business model by which one of the core products of Britain’s retail trading environment operates, resulting in a decimation of share prices among many major companies yesterday.
The FCA intends to invoke the following:
- 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.
Many firms have released their responses to this, however in order to gain a very full perspective with regard to the likely effectiveness of the proposed framework, FinanceFeeds spoke today to Quinn Perrott, who owns TRAction FinTech, a trade repository reporting service for OTC FX and multi-asset derivatives.
Mr. Perrott stated “After reading the news recently of the FCA lowering leverage at first I was a little shocked, however then I sighed…. Another well-meaning attempt to protect the general public that won’t have the desired affect.”
“Firstly, lowering leverage isn’t going to save clients from losses, it may just take them a little longer to lose the money” – Quinn Perrott, Owner, TRAction FinTech
Mr. Perrott continued “Additionally, risk is a factor of leverage AND volatility. 50:1 is quite high leverage on share CFDs but quite low on a stable FX pair like AUD/USD. I’m sure Brokers with an AFSL or Cysec CIF will be pleased with the news as in future international clients will probably prefer to trade in these jurisdictions.”
In conclusion, Mr. Perrott said “Until now the FCA has been the most prestigious licence to have, especially with the compensation scheme. Those days appear to be numbered.”
FinanceFeeds is of the opinion that this was a very disingenuous step to make by the FCA, on the basis that very little market disruption or cause for customer complaint ever emanates from large, often publicly listed CFD firms based in England. Indeed, these are some of the most highly regarded and well organized electronic trading companies in the world, and are a mainstay of London’s (or Bristol in the case of Hargreaves Lansdown) retail trading sector that spans in some cases close to 3 decades.
Therefore, why the FCA has chosen to take this step at this particular juncture is peculiar indeed, bearing in mind that the very same regulatory authority was quick to stand in favor of payment services provider PacNet and publicly announce that it would uphold its license even though the US Treasury designated it and its subsidiaries including Counting House, to be criminal organizations that facilitate money laundering.
Additionally, binary options firms that have been the subject of nationwide bans by Norway, France, Germany, Denmark, Holland and Belgium – all nations with a far less developed financial markets infrastructure than that of Britain – are allowed to propagate their services unabated in the UK, which serves to demonstrate that, whilst the FCA has perhaps been working on this consultation paper for some time, its priorities appear to be at the very least infra dig.
