Join our community of smart investors

FTSE 350: Financial services battle rule changes

Even without Brexit-induced uncertainty, some financial services business models are struggling to meet tighter regulations
January 24, 2019

Regulation will remain a headache for the financial services sector in 2019 – Brexit-related or otherwise. London Stock Exchange Group’s (LSE) LCH clearing business may have been granted a reprieve after the EU issued a 12-month grace period for European derivatives traders to continue using clearing houses after a potential no-deal Brexit, but beyond that access rights are still uncertain. What’s more, a further downturn in equity markets could dent the IPO and secondary fundraising markets, although the group is becoming less reliant on capital markets business.

Elsewhere, some groups are grappling with the Financial Conduct Authority (FCA) tightening rules around the services they market and sell. Provident Financial (PFG) expects new rules on affordability testing for credit card users to lead to a slowdown in receivables growth this year for Vanquis Bank, which accounted for 60 per cent of revenue during the first half of 2018 and which has already been hamstrung by rising bad debts.

The long-term effects of reforms to the contracts for difference (CFD) market are unclear, but IG Group (IGG) and Plus500 (PLUS) both expect a decline in revenue this year, as clients choosing to be classed as ‘professional’ are not yet offsetting the loss in business from retail investors within the EU. The market seems doubtful that Plus500 – which has a high customer churn rate – will be able to continue its run of profit upgrades against the tighter regulatory backdrop. Despite rising sharply in the past year, the stock is now one of the most heavily shorted on the London exchange.  

If there is one company in the sector that thrives on regulatory changes and complexity, it is Sanne Group (SNN). Although its shares and margins have slipped of late, the compliance specialist has already reported an uptick in business in Luxembourg and Dublin from businesses looking to hedge against the outcome of Brexit negotiations.

 

NamePrice (p)Market cap (£m)12-month change (%)Trailing PEForward PEDividend Yield (%)Last IC View
3I 8177949.14-146.56.83.67Hold, 797.8p, 15 Nov 2018
Amigo Holdings259.951235.63 12.210.50Hold, 265p, 27 Nov 2018
Charter Court 276.6661.96-5.276.35.90Buy, 298p, 14 Nov 2018
Funding Circle 341.41181.36   0Sell, 312p,10 Jan 2019
IG Group 624.52303.43-17.4512.4126.92Hold, 862p, 25 Jul 2018
Investec483.63298.74-10.288.88.55.07Hold, 489p, 16 Nov 2018
IP Group109.21156.59-19.11 10.20Buy, 126p, 25 Jul 2018
London Stock Exchange440415333.3719.3826.122.61.24Buy, 4,040p, 3 Jan 2019
Plus50015291738.4347.596.18.411.22Hold, 1,525p, 20 Sep 2018
Provident Financial5351355.074.6110.79.50Hold, 521p, 16 Jan 2019
Sanne Group543792.23-27.1121.118.12.39Hold, 604p, 11 Sep 2018
TP Icap318.41793.66-40.519.610.15.29Hold, 290p, 10 Aug 2018