The near-term prospects for the profitability of the UK's spread-betting industry were thumped this week, with analysts expecting the sector to suffer after a proposed regulatory crackdown.
The Financial Conduct Authority (FCA) proposed tougher restrictions on spread-betting and contracts for difference (CFD) providers, prompting major share price falls in the listed players.
The FCA's analysis of a representative sample of CFD companies found 82 per cent of clients lose money on these products and so it has proposed a package of measures, including capping the maximum leverage for retail investors at 50 times the amount traded, as well as introducing lower caps across different asset classes depending on the risks involved. Some levels of leverage offered to these customers exceed 200:1, according to the review.
Inexperienced retail investors, with less than 12 months' experience in trading CFDs, would have a maximum leverage cap of 25:1. Other rules proposed include preventing providers from using any form of trading or account opening bonuses to promote CFD products.
Broker Liberum believes the proposals will be positive in the long term by driving out some of the private and more unscrupulous operators. However, in the short to medium term "we will undoubtedly see a negative impact on growth and profitability", it said.
Analysts at Numis agreed that the regulator was likely looking at the lower-quality end of the market, but felt that the new regulations would hit a company it covers, CMC Markets (CMCX), suggesting the moves by the FCA would "have a material impact, at least in the near to medium term, on CMC's growth and profitability" in the UK and Europe. It downgraded the stock to 'sell' from 'hold', adding that it would "materially reduce" its forecasts.
The shares in CMC Markets dropped 12 per cent on the day, less than the 28 per cent by IG (IGG) but more than rival Plus500's (PLUS) shares, which dropped 8 per cent.
UK-based IG, whose rating is now 'under review' by Numis, acknowledged shortcomings in CFD and binaries marketing by certain companies, but said this was often by companies operating abroad, whom it did not think the FCA's proposals covered.
CMC Markets said the group focuses on "higher-value, experienced premium clients" who understand the markets and products they are trading, while Plus500 said the proposals would "have a material operational and financial impact on the UK regulated subsidiary, which represents approximately 20 per cent of the group's revenues".
