Impact on British FX companies if Britain leaves the EU: Industry investigation

This morning, FinanceFeeds took a close look at the potential regulatory changes that may involve British FX and CFD firms wishing to provide services to a European client base, and vice versa.

With the MiFID rulings having been invoked at a time at which the European Union incorporated the United Kingdom alongside 27 other member states, and no referendum on EU membership having ever taken place in the past, it is of great interest to take a look at how companies in the current European Union will adapt their operations to take into account a possible loss of the EU passporting facility between customers in mainland Europe and British firms, and between customers in Britain and European firms.

In some respects, it appears at first glance as though the companies with FCA regulated offices in Britain which are owned by overseas entities that established British offices subsequent to their originally established operations in Europe may have a degree less bureaucracy to overcome, and the possibility of a ‘Brexit’ would not require any adjustments, because the license in Britain would apply to British customers, and the license held by the company’s main headquarters in Europe would cover the European customers.

For example, FxPro originally established itself in Cyprus, and maintains a CySec license, before heading to Britain to open an FCA regulated office in London.

Other examples include FXCM, which although a NYSE-listed American company whose head office is licensed by the National Futures Association and is based in New York, has an office in London with an FCA license, and offices in France, Germany and Greece, therefore not requiring any amendment to its operational client onboarding and servicing procedure should there be a Brexit.

Interestingly, it is Britain’s stalwarts which have a well established client base in Britain that are headed up by some of the most pro-Brexit senior executives.

CMC Markets, whose customer base is largely UK-centric, with a further large client base in Germany, was founded by former Treasurer of the British Conservative Party Peter Cruddas, who donated £1 million to a campaign which advocates Britain’s independence from the EU, and is a regular contributor to editorials in mainstream press about the potential prosperity of a pro-Brexit Britain.

Another example is Peter Hargreaves, co-founder of Britain’s largest electronic financial services company, Hargreaves Lansdown.

Mr. Hargreaves co-founded Hargreaves Lansdown from a bedroom in 1981. In 2010, he stood down as CEO, receiving £18 million in payouts from dividends when he was succeeded as CEO by Ian Gorham. His net worth in 2011 stood at £1,025 million and the company that he founded has a market capitalization of £6.9 billion, solely from conducting business with British retail customers.

The company operates, among many divisions, HL Markets, which is a white label of IG Group, and operates its proprietary Vantage system which allows customers to manage their entire investment portfolio from one platform.

Leaders of UK-centric firms are Brexit supporters, despite potential end to passporting

Peter Hargreaves is a staunch supporter of the ‘vote leave’ campaign and is regularly quoted in British mainstream media on his perspective on Britain’s future outside the EU.

Whilst Hargreaves Lansdown has no business at all outside Britain, IG Group and CMC Markets do, however the majority of their business is in other Western European nations.

Today, FinanceFeeds spoke to a very experienced regulatory professional in Britain, who understands the way that the laws are likely to pan out should there be a majority vote for Brexit on June 23 this year.

“I believe there are numerous ways a Brexit scenario can play out. More likely than not, in replace of being part of the EU, the UK will sign new free trade agreements with EU partners.”

“In the financial industry, the agreements will allow for a continuation of the current cross-border passporting of services that currently takes place now and allows brokers with a license in Cyprus to market in the UK and vice-versa.”

“The flexibility of the trade agreements will depend on the individual industry and amount of money flowing out of the EU and into the UK. For example, Luxembourg will probably do all they can to make sure the flow of UK investments continues with minimal friction to their massive hedge fund and asset management industry. But, an area like insurance where the UK is the dominate player in the EU, may see some new requirements enacted to do business in the EU” he concluded.

Lior Shmuely, CEO at Archer Consultants explained to FinanceFeeds “It very much depends on the broker and the type of business that they operate in Britain or the European Union.”

Concurring with FinanceFeeds’ opinion that brokerages that originated from other European countries and subsequently applied and were granted an FCA license for an office in London will not have to apply for any new licenses or set up in other jurisdictions, this potential possibility only applying to firms with British licenses or European licenses only, Mr. Shmuely continued “that is a given.”

Not even the giants of the industry will apply for a German banking license – Cyprus, Bulgaria and Malta are more likely

Mr. Shmuely believes that Britain will remain a member of the EU and therefore it is unlikely that any such action may be needed, however it is still a referendum, therefore all considerations are possible.

When asked if any of the large spread betting and CFD companies from the UK would potentially open regulated offices in the European nations in which they have the largest non-UK client base, Mr. Shmuely said “Absolutely nobody will go to Germany. It is too expensive and too difficult. Even the largest companies in this industry avoid applying for a German banking license.”

He concluded “Cyprus, Malta and Bulgaria are all options, due to their being a quick and comfortable MiFID solution that covers all European Union jurisdictions, however I do not think it will come to that.”

The reputation and size of some of Britain’s electronic trading giants is sufficient to ensure to ward off uncertainty of the unknown with licenses in Malta or Bulgaria, for example.

Trevor Clein, CEO of TRE Compliance in London concurred. “At this stage it is guesswork as to what will happen if there is BREXIT. It seems logical that firms may re-locate to Frankfurt or Dublin or somewhere else in the EU because of the passporting arrangement all regulated firms currently have. Some firms like JP Morgan have already indicated that they will re-locate to Frankfurt. At the moment it is pure speculation as we have never been here before, and even the FCA have no clue as to what may happen.”

From a brokerage perspective, Manuela Mazzacco, CEO at AFX Group then explained “It’s always been important in the derivatives industry to offer either a local presence or local language support to retail clients. This provides the right level of support that clients need whether starting their trading life or continuing it. Regardless of an in or out vote, I don’t think we’ll see a huge change in the way British-based CFD and FX firms operate in this respect; and if anything I think the industry will continue to support more languages as the geographic diversity of clients increases.”

Following on from this, Nauman Anees, CEO of ThinkForex in London explained “”UK is still a financial services hub for the FX and CFD industry . Even if Brexit did happen those jobs wouldn’t disappear overnight nor the companies that offer then.  Most companies would just go to a EU jurisdiction and obtain a secondary regulatory license to passport from there.”

“Much larger market could trigger a wave of consolidation”

“There are many options for qualified and we’ll capitalized firms . For new entrants in the market it will be much harder will trigger a wave of consolidation as they will not be able to maintain two licenses and operations without additional cost , capital and compliance” said Mr. Anees.

Now there’s an interesting thought…..