IG plans for UK’s exit from EU, develops MTF for European market, notes regulatory concerns

Electronic trading giant IG Group Holdings plc (LON:IGG) has just released its report for the full year to May 31, 2017, with our attention pinned on any strategic announcements included in the document. There are at least a couple of these, including new offerings and business establishment.

• MTF

IG has started work on developing a multi-lateral trading facility (MTF) to serve the European market. This on-exchange offering is set to provide further protection for IG’s business across Europe and enhance the growth prospects in this region. There can be no certainty of success here, however, the Group notes.

• Brexit

IG is planning for the UK’s exit from the European Union (EU), and good progress is being made in obtaining regulatory approval for a subsidiary based in the EU. The Group is also at the early stages of exploring further opportunities outside the EU.

• DailyFX

The acquisition of DailyFX from FXCM for $40 million was completed in October 2016. IG says that the websites are delivering the expected number of new leads, but adds that the rate of conversion into trading clients has been “lower than anticipated”. At the same time, the accounts which are opened have proved to be more valuable than expected.

• Onboarding process

IG has conducted a full review of its onboarding criteria and process. As a result of this, IG changed a number of elements, including raising its self-imposed wealth hurdles and its minimum deposit. IG has also introduced globally a new appropriateness test which means that prospective clients that were previously allowed to proceed at their own risk can no longer have a leveraged account with IG unless they can demonstrate that they understand the potential risks and rewards of such an account. Due to this, the company expects to recruit fewer clients, of greater average value, and so may see a fall in simple measures of market share.

• Limited Risk Account

This type of account was relaunched in July 2016 – it caps the downside risk of every trade. IG also only provides this type of account for new clients with lower levels of appropriateness, experience or wealth. In the last half of the year, around 28% of all OTC leveraged first trades were Limited Risk.

• Retail clients and professional status

A potentially mitigating factor to the impact of any regulatory restrictions on retail clients, according to IG, would be qualifying clients electing to take on a professional status in order to go on trading as before. To qualify, a client must pass two of the three tests defined under MiFID – sufficient trading experience, a substantial investment portfolio, relevant occupational experience. IG’s revenue is relatively concentrated towards the most active end of the client base. In the last year, 80% of IG’s revenue (excluding the US) was generated by less than 9% of clients. The vast majority of IG’s top 9% of clients have a recent trading history which would suggest they should pass the sufficient trading experience test. In addition, a recent independent survey found that approximately 15% of IG’s clients have a financial instrument portfolio of a sufficient size to pass the second test.

• Key areas of regulatory concern

With a number of jurisdictions, including the UK, planning new rules for the online trading industry and new measures for the protection of investors, IG is outlining five main areas where regulators are expressing concern and suggesting the need for remedies:

– Marketing. Regulators are seeking to ensure the product is marketed only to the correct audience, with an appropriate risk warning, including the probability of trading successfully. This would also outlaw sports sponsorship.

– Bonus offers. There is a movement to ban account opening bonus offers.

– Appropriateness. There already exists an obligation to assess whether a product is appropriate for a prospective client. However, under current MiFID guidance, firms are allowed to warn prospective clients that the product is inappropriate but allow them to proceed to trading. The ESMA Q&A makes it clear that a prospective client should not be allowed to proceed where the product is deemed inappropriate.

– No negative protection. Certain regulators have mandated only offering accounts to retail clients where the client cannot lose more money than they have deposited on their account. ESMA has indicated this may form part of its future guidance.

– Leverage. There already exists an obligation to act in the best interests of a client. Given this, it is already impossible to justify high levels of leverage where the significance of the transaction fee can skew the client’s probability of success.

IG fully supports these developments.