The UK financial regulator has announced a tough permanent crackdown on speculative derivatives in another blow to the online trading sector, which is already grappling with temporary EU rules.
The Financial Conduct Authority on Friday announced proposals to permanently restrict the sale and marketing to retail punters of contracts for difference — derivatives that allow traders to track the price of an underlying asset such as gold or shares. It also proposed a ban on the sale and marketing of a less popular derivative, binary options in a bid to protect inexperienced punters from heavy losses.
The proposals, which include curbs on the amount of leverage punters can use to pump up their bets, are similar to temporary measures introduced by the EU markets regulator earlier this year. But they go even further in that the FCA will also consult on whether to target “closely substitutable products” such as “CFD-like options”, future and turbos, a type of indexed debt instrument.
The EU regulatory clampdown has already hit the profitability of London-listed groups such as IG Group, CMC Markets and Plus500 recently, prompting senior departures and share price drops. Earlier this year IG said it hoped to offset the impact of the rules by developing leveraged trading products similar to CFDs that had not been targeted by regulators, such as turbos.
But the FCA said on Friday it intended to “stop firms getting around these measures by offering retail consumers CFDs in slightly different legal forms.”
The FCA estimated the CFD proposals could reduce annual losses for retail consumers of UK firms by between £267.4m to £450.7m, while the binary options ban could save retail customers £17m per year.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products. This is despite focused supervisory work over several years to try and improve firms’ conduct.”
The watchdog also said it would launch a separate consultation in early 2019 into a potential ban on the sale and marketing of cryptocurrency-based CFDs.