Investors in Britain's biggest spreadbetting firms scurried for cover today after European regulators revealed tighter than expected clampdown on the sector.
Almost £400m was wiped off the combined valuations of the three largest listed spreadbetters. Shares in IG Group and Plus500 fell 10 per cent, while CMC Markets fell by over 11 per cent.
On Friday night the European Securities and Markets Authority (ESMA) revealed eagerly awaited details of restrictions on the sector.
Top of the list was a complete ban on the sale of binary products to retail investors. ESMA also wants to dramatically reduce contracts for differences leverage (CFD) limits to levels lower than previously laid out by Britain's Financial Conduct Authority (FCA).
The FCA said it supports the latest ESMA proposals.
IG, the UK's largest spreadbetting firm, blasted plans to reduce leverage limits – the amount of risk/reward a retail investor exposes itself to.
In a statement issued this morning, it said:
The leverage restrictions under review are disproportionate and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage. The danger of disproportionate leverage restrictions on regulated firms is the risk that they will push retail clients to trade CFDs with unregulated firms based outside the EU potentially resulting in poor client outcomes.
Rival CMC was more supportive of the changes, reasserting that it welcomed the introduction of a "level playing field". CMC did, however, concede the proposed changes "may have an impact on the group".
Plus500 kept its powder dry, saying it will "wait for the conclusion of the consultation expected in January 2018 to understand where it will need to implement necessary adjustments to its business model".
Chief executive Asaf Elimelech added: "It is difficult to assess the impact upon our business."
All three firms said the proposed binary ban would have little to no impact on their business model because they either no longer offered the products or they did not represent a material part of operations.
Read more: Plus500 has scored higher revenue once again
|What is the difference between binaries and CFD?|
|Binaries and CFD have a number of similar traits and are often available on the same underlying assets.
A binary is effectively a yes-no bet on a specific outcome – this means investors either lose all their money or make a certain return.
CFD work differently by mirroring the returns of an underlying asset, meaning investors can win or lose part of their initial stake. But CFD investors can also win or lose more than their initial stake by leveraging their investment so it is more than their initial stake.
A year ago, City watchdog the Financial Conduct Authority (FCA), surprised the spreadbetting sector by unveiling its own plans to protect retail investors. A number of other European regulators followed suit and during this summer the matter was passed onto ESMA, so changes could be imposed Europe-wide.
The FCA plans did not reference binary options contracts because at the time they were regulated not by the financial watchdog, but by Britain's gambling regulator, the Gambling Commission. The watchdog did propose reducing CFD leverage limits to a maximum of 25:1 for new customers and 50:1 for experienced ones.
But ESMA's plans go much further, lowering leverage to between 30:1 and 5:1 depending on the volatility of the asset invested in.
Similar to the FCA proposals, ESMA wants to restrict trading bonuses and incentives, as well as standardising risk warnings.