The regulator's plans to ramp up rules for companies selling contract for difference (CFD) products will be harmful to spreadbetters, regardless of whether they were the intended target of the watchdog, analysts warned today.
The Financial Conduct Authority (FCA) this morning outlined plans to tighten the rules around CFDs, including spread bets - and shares in spreadbetting firms dropped like stones as trading opened. In late morning trading, CMC Markets was down 31 per cent, IG Group was also down 31 per cent and Plus500 dropped 26 per cent.
One of the proposed new rules is setting lower leverage limits for inexperienced retail clients with less than 12 months' experience of active trading in CFDs, with a maximum leverage limit of 25:1, and analysts believe that this measure aimed at firms who target novice traders will have a negative impact on other companies operating a different model.
"This is negative – period - and CMC Markets and IG Group – the two that operate to the highest standards in the industry in our opinion – are collateral damage," said Paul McGinnis at Shore Capital.
"We do not believe that they are the intended targets, but will be negatively impacted nonetheless. While the quantum of the impact is very difficult to determine, we believe the companies will experience share price reactions as a result of souring sentiment, derating and a likely negative impact to forecasted growth."
McGinnis noted that, according to their last published financial statements, CMC Markets earns just under 40 per cent of its revenue in the UK, while IG Group earns just over 50 per cent of its revenue in the UK, and said: "We believe that it is possible and likely that other countries within the EU follow suit.
“If you’ve got an existing and experienced base as IG and CMC have I wouldn’t expect it to impact as much as Plus500 who are targeting the more inexperienced clients.”
In its response to the FCA, IG highlighted that the regulator's proposals "do not appear to directly apply to firms operating from outside the UK offering CFDs and binaries to clients in the UK on a cross-border services passport from another EU member state".