UK online trading leader IG Group Holdings plc (LON:IGG) has issued a formal statement in response to the proposals made late last week by pan-European regulatory authority ESMA to severely rein in the world of online leveraged trading in the EU.
And, it wasn’t all laudatory.
While IG did state that it is is “supportive of the objectives of regulators to improve client outcomes in the industry”, and that it “supports ESMA in its efforts to achieve harmonisation of regulation across the EU”, IG called ESMA proposed leverage restrictions “disproportionate”. ESMA stated that it plans to impose a hard 30x leverage cap on Forex and CFD trading across the EU, and that for certain high-volatility instruments leverage would be restricted to as low as just 5x.
IG stated its opinion that the 30x leverage cap goes “beyond what is needed to protect consumers from poor outcomes associated with excessive leverage”.
And, we’ve stated is already happening in countries such as Belgium which have come down very hard on the online trading industry, instead of protecting consumers that proposals may “push retail clients to trade CFDs with unregulated firms based outside the EU potentially resulting in poor client outcomes.”
As far as ESMA’s other proposals go, IG stated that it believes that enforcing consistent close-out procedures, putting a guaranteed limit on client losses, restricting trading incentives such as bonus offers, and issuing standardised risk warnings would all improve client outcomes if implemented appropriately, and enforced effectively.
IG didn’t offer an opinion on the wisdom of a total ban on Binary Options trading proposed by ESMA, but did point out that revenue from binaries represented less than 5% its overall income.
The complete statement issued by IG this morning reads as follows:
18 December 2017
IG GROUP HOLDINGS PLC
Response to FCA and ESMA announcements
IG Group Holdings plc (“IG”, “the Company”), a global leader in online trading, notes that the European Securities and Markets Authority (ESMA) and the Financial Conduct Authority (FCA) have issued statements updating on their work in relation to the provision of contracts for difference (CFDs), including rolling spot forex, and binary options to retail clients.
IG is supportive of the objectives of regulators to improve client outcomes in the industry, and the Company supports ESMA in its efforts to achieve harmonisation of regulation across the EU.
The ESMA statement sets out that it is considering the possible use of its product intervention powers under Article 40 of MiFIR to address investor protection risks. Without providing specific detail at this stage, ESMA is considering measures to prohibit the marketing, distribution or sale to retail clients of binary options, and to restrict the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex.
The restrictions on CFDs currently under review by ESMA are:
- Leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset;
- A margin close-out rule (to ensure retail clients’ positions are automatically closed when they run short of margin;
- Negative balance protection to provide a guaranteed limit on client losses;
- A restriction on benefits incentivising trading (commonly known as bonus offers);
- A standardised risk warning.
The statement sets out that ESMA will conduct a brief public consultation on this matter in January 2018. Any product intervention measure adopted by ESMA under Article 40 of MiFIR can have an initial duration of up to three months and is renewable.
The statement from the FCA notes the announcement by ESMA, and sets out that the FCA supports ESMA in its consideration of potential EU-wide product intervention, that the FCA’s policy work applicable to firms offering CFDs and binary options to retail clients is ongoing, and that any permanent FCA policy measures would take into account any prospective ESMA measures.
IG differentiates itself within the industry through its good conduct. The Company adheres to the highest regulatory standards, and through its focus on ensuring that its marketing and advertising reaches an appropriate audience, IG seeks to only accept clients who understand the risks involved with its products and how they operate. The Company’s long held view is that robust supervision around who the product is marketed to, and which applicants are accepted as clients, remains the most significant measure to drive improved client outcomes.
IG believes that enforcing consistent close-out procedures, putting a guaranteed limit on client losses, restricting trading incentives such as bonus offers, and issuing standardised risk warnings would all improve client outcomes if implemented appropriately, and enforced effectively.
With respect to binaries, IG stopped offering its Sprint binary product to new retail clients in January 2017. Revenue from binaries traded by clients in the UK and EU has therefore reduced, and represented less than 5% of the Company’s revenue in the first half of the current financial year.
IG believes that 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.
All the measures that ESMA and the FCA are considering relate to retail clients. Whilst IG has historically categorised the vast majority of its clients as retail as a matter of course, IG’s client base is different from most in the industry due to the company’s long term focus on clients of high value and sophistication. IG launched its online process that allows clients to apply to be categorised as an elective professional in mid-November 2017. Since then, the proportion of IG’s UK and EU revenue generated by professional clients has increased from 5% to 15%, despite there being limited current advantage to them being categorised as such. IG believes that clients representing well over half its current UK and EU revenue are eligible to be categorised as professional and will elect to be treated as such if the products that they can trade and the leverage they can utilise diverges from that available to retail clients.
IG believes that any financial impact from the implementation of the prohibition on binary options and the restrictions on CFDs being considered by ESMA is unlikely to be significant in the current financial year.
It remains difficult to predict what impact regulatory change may have on the business in subsequent financial years. The Company believes that any reduction in historic annual revenue from the implementation of the measures currently being considered by ESMA, taking into account the actions being taken by the business to mitigate the impact, would have been less than 10% including the impact from lower binary revenue. If such measures were implemented the Company would also expect to flex marketing spend and resource allocation according to opportunity.
IG has delivered a sustainable business for over 40 years by placing good client outcomes at the heart of everything it does. Good conduct, from the way products are designed, to how they are marketed, to who firms allow to use them, is essential in protecting against poor client outcomes. Leveraged derivative instruments such as CFDs are not appropriate for everyone. IG is supportive of many of the measures being considered by ESMA and would welcome proportionate regulation of the industry. In IG’s experience, when proportionate regulation has been applied consistently and appropriately, client outcomes have improved, and compliant providers have benefitted over the longer term.