Europe regulators back tough rules for spread-betters

Europe’s markets watchdog has firmed up tough new rules to restrict online trading platforms that offer risky speculative products to retail investors. The rules come despite frantic lobbying from the industry, in a blow that is set to knock its profitability.

Using new powers granted to it at the beginning of the year, the European Securities and Markets Authority detailed stringent restrictions on the amount retail punters can borrow to leverage their bets using so-called “contracts for difference” products. Leverage allows investors to pump up returns but can also greatly magnify losses. 

The long-awaited clampdown is designed to offer more protections for retail investors following concerns that the products are too risky for inexperienced traders. Studies by national regulators have shown that between 74 and 89 per cent of clients lose money on the products, Esma said. 

Esma has decided to stick with its original proposals, which were first put forward in December, despite harried lobbying from the industry during a short consultation period. Last month IG Group, Europe’s largest online trading platform, set up a website where customers could protest against the plans, garnering about 14,600 responses. 

But Esma said on Tuesday that it had concluded that there was a “significant investor protection concern” in relation to the products, given their complexity, the availability of “excessive leverage” and their lack of transparency. 

“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors,” said Steven Maijoor, Esma’s chair. 

However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors. A pan-EU approach is required given the cross-border nature of these products, and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue.

The move marks the first time the regulator will use new so-called “product intervention” powers, granted to it under the sprawling Mifid II legislation that come into force at the beginning of January. 

Esma confirmed that it would restrict leverage to between five and 30 times the amount a customer has as a cash deposit in their trading account, depending on the volatility of the asset. Most companies currently allow customers to borrow up to several hundred times for certain products. 

Leverage for products based on cryptocurrencies, which have become increasingly popular among amateur traders but are prone to wild swings in price, would be further limited to two times, Esma said. 

It will also enact a long touted ban on the sale to retail clients of binary options products — leveraged wagers on whether financial indices, such as the price of gold or the FTSE 100, will rise or fall. While offered legitimately by large listed players such IG Group, the quick-fire products have also often been linked to illicit boiler room scams. 

The decision is the culmination of more than a year of uncertainty for the online trading sector. The UK’s financial watchdog announced its own clampdown in a shock announcement that knocked the shares of big London-listed players IG Group, CMC Markets and Plus500 by more than 30 per cent. The Financial Conduct Authority later said it would hold off its plans – which were less stringent than this final set of rules – in anticipation of Esma’s Europe-wide clampdown. 

Esma said it would adopt the measures in the official languages of the EU in the coming weeks before publishing them in the EU’s Official Journal. The rules on binary options must be implemented one month after that publication and while the rules on CFDs apply two months after, it added.

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