FCA proposal – further information and request for your feedback

[Guest DanC]

As you may be aware, there has been a recent proposal from the Financial Conduct Authority (FCA), which would, among other things, reduce the leverage permitted for CFDs and spread betting.  If the proposal goes through, you’ll need to put more money on your account to trade with us, in some cases up to ten times more margin.

 

Click here to share your views on the FCA's proposal now.

 

The FCA is seeking to raise conduct standards across the industry, to ensure fair outcomes for all UK clients – something which IG fully supports. However, we think there may be tools that could better help the FCA do so, such as limited-risk trading to prevent clients from losing more than their initial deposit. German and French regulators have suggested this measure too, and we believe it might be more effective than raising margins for all.

As well as increasing margins (ie reducing leverage), the FCA has proposed:

 

• Firms must disclose their average client profit/loss, and use standardised risk warnings: This seems sensible to us. We believe in transparency and we think it is really important that people understand CFDs and spread betting before they open an account.
• No bonus promotions allowed: This appears to be a good measure. We don’t think bonus promotions should be an important tool for winning clients.
• A full review of rules relating to binaries: The FCA believes that the inherent features of binary bets make them inappropriate for many retail investors. We believe binary bets and binary options are a useful tool for retail traders, if they are marketed and sold responsibly.

 

You can read the FCA’s full proposal and suggested leverage limits here.

 

This gives you an idea of what IG think, but what’s really important is what you think. It’s essential that the FCA receives opinions from everyone involved in the industry – especially traders.

 

The FCA has put together a simple form to enable you to share your views easily. Click here to share your views now.

 

If you prefer, you can also contact the FCA by email at cp16-40@fca.org.uk, or by letter to:

 

CP16-40 - Wholesale Conduct Policy Team

Strategy and Competition Division

Financial Conduct Authority

25 The North Colonnade

Canary Wharf

London E14 5HS

 

We’d also appreciate any comments or thoughts you may have below.

 

Thanks,

Dan

[Guest magpie]

It's not really surprising that most traders don't survive their first year.  Most small business startups don't survive a year either and can have considerable set-up costs in the form of stock, premises and whatever else.  There's no guaranteed stop loss in business.

 

Internet trading requires only small capital risk (if you're sensible about it) and the opportunity to learn how to trade at your own pace. Using  Demo accounts it's possible to practice risk free, to try out strategies, to evaluate 'tipsters' and measure the validity of hunches before committing any cash at all to the exercise.

 

Trading is a skill and it costs money to learn most skills.  Consider the cost of driving lessons, golf lessons, and let's not even think about the estimated forty thousand pounds it costs to get a degree!!  (with no guarantee of ever being able to repay a student loan)

 

I think the FCA proposals are out of order and well over the top,  they will merely exclude some small traders ever being able to start out on what is an interesting and highly educative activity.

 

 

 

 

[Guest smileypete]

Well I sent in my response earlier today as follows. I sincerely hope it will help to persuade the FCA that their intentions are misguided! :smileyfrustrated:

 

 Q1: What investment need(s) do CFDs fulfil for retail clients and would they be disadvantaged if they no longer had access to these products?

They give the client access to a wide variety of trading and investment opportinities across a wide variety markets, with a low barrier of entry and low costs, and of course the potential to make good profits. Additionally this promotes learning about financial markets and so increases financial literacy which must surely be a good thing.

If they no longer had access to these products then it puts them (the 'little guy') at a huge disadvantage to institutions, high net worth individuals, and retail clients in other countries who would remain able to benefit from these opportunities.

Looking at the bigger picture, in general I strongly believe in a free society it should be up to the individual to decide how to legitimately spend their free time and money, and the FCA should facilitate that where possible.


Q2: Do you agree with our proposal to require enhanced disclosures for CFD products?

Generally, yes

I'd agree that it can be useful, if it does not come at excessive cost, as ultimately these costs are paid for by the clients themselves.


Q3: Do you agree with our proposal to require CFD firms to disclose the percentage of client accounts that are in profit or loss over the previous calendar quarter and over the last 12 months?

Generally, yes

It may more practical to use derive an industry standard figure (80-90%?) for all firms to use by default and revise this every couple of years. If firms wish to use their own periodically audited figures instead then that could be allowed too.


Q4: Do you agree with the proposal to limit the risks of CFDs by taking steps to limit leverage for retail clients?

Definitely NO for experienced clients.

For more experienced retail clients with advanced trading practices, it will penalise them and they will likely need to move their trading activities to other jurisdictions, possibly less well regulated and reputable, to retain the same benefits as currently and successfully offered by FCA regulated firms.

Generally a good trader will use diversification and hedging to ensure the leverage per trade is fairly low despite the overall account leverage being much higher, and only resort to higher leverage for short periods of time.

For example a longer term currency futures position can be hedged with a short term spot currency position, or a basket of equity positions may be hedged with a stock index position. Both require high amounts of leverage but are largely market neutral and so the risk is low.


Q5: Do you agree with the proposal to adopt different leverage limits for inexperienced and experienced retail clients?

Possibly yes for inexperienced clients.

It may be of help to limit leverage for inexperienced retail clients for a short period, say 3 months. This should be quite enough to gain an understanding of the challenges involved and I feel a year is far too excessive.

Also any more than a short period will restrict competition for more experienced clients who may wish to move thier accounts or open new ones.


Q6: Do you agree with the proposed margin limits for inexperienced clients and experienced retail clients?

Possibly yes for inexperienced clients, definitley NO for experienced clients.

I feel that the leverage limit for inexperienced clients could be set to 25:1 by default for a short initial trial period, but should be able to be increased to 50:1 at any time during the trial period by specific request of the client.

This is because Cysec and US regulated brokers are allowed are allowed to offer 50:1 to inexperienced retail clients and restricting leverage below this level will put FCA regulated brokers at a competitive disadvantage to these firms, and client aquisition is all important, costing considerable sums per client.

However after the initial period the margin limit should be able to be increased by specific request of the client (ie not automatically or at the invitation of the broker.) but there should be no restriction other than that borne by the broker who carries the risk and pays levies to the FSCS.

The UK based CFD/spreadbet industry is an all too rare UK success story - but please note that aside from using their services, I have no connection with the industry at all!


Q7: Do you agree with the proposal to set a margin close out limit of 50% of initial margin required? In particular, we welcome feedback on the detailed drafting of this rule and whether it is compatible with standard market practices.

Definitely no.

Generally measures like are misguided intentions to 'fix' the problem of the low success rate of retail traders, but it simply cannot change the fact that trading is an extremely highly competitive and challenging activity, and therefore the success rate cannot be high!.

Generally traders are unsuccessful largely due to a high number of 'common mistakes' and attempting to force a fix one or two will not change the overall success rate.

It could be useful to inexperienced clients to ensure brokers represent stop levels explicitly as 'non guaranteed stops', and have an email/SMS 'margin warning' at 50% of initial margin that is in place during a trial period but can be opted out of after that.


Q8: Do you agree with our proposal to ban bonus promotions or other incentives to open accounts or trade?

Generally yes, with some exceptions.

I absolutely agree that it is necessary to ban restrictive bonuses and predatory marketing such as high pressure telesales. But smaller non restrictive bonuses and promotional offers like retail vouchers could be a legitmate marketing tool.


Q9: What investment need(s) do binary bets fulfil for retail clients, and do you agree with the risks we have identified?

I am not very familiar with binary bets so feel unable to comment, though I can see they may be used to limit risk when trading volatile markets such as major news events.


Q10: What are your views on limiting the marketing of binary bets to some retail clients?

It seems that by far the majority of actual problems are not due to the marketing from FCA regulated firms offering binary bets, but are from operations abroad that are non FCA regulated and are essentially 'boiler rooms' with all manner of abusive practices including the high pressure sales of bogus 'investment services'.


Q11: What are your views on the potential use of product intervention powers under MiFID II to restrict specific features of binary bets or place limits on the distribution or sale of these products for retail clients?

Some of the recent proposals from Cysec in their recent announcement 'Enhancing the Regulatory Obligations of CIFs when providing binary options' appear to be well reasoned and appropriate, perhaps the FCA could consider harmonising with these.


Q12: Are there any alternative policy measures that we should consider to address our investor protection concerns in relation to binary bets?

As said the recent proposals from Cysec seem well reasoned and should increase fairness and transparency.

[Guest Trader_1707]

Will it affect on Binary Options trading?

 

[donaldprice]

I have commented on the FCA proposals on their website. I myself find the FCA's approach to this issue some what extreme and some lack of clarity of the pool of data they have collected that demonstrates that a high percentage of participants lose money. 

I do think its always a good idea to assess on an individual basis the appropriateness of leverage based products for each potential client, which IG does already and has got a significant amount of information and links to risk management. 

If i was to make a suggestion in regards to CFD's, in the tear of ticket area, it may possibly be an idea to specify clearly what each contract represents, so for example FTSE100 1 contract= £10 Per/point. Therefore you know that for every point moved you are gaining/risking £10. 

I do also wonder if it would be an idea since the FCA are suggesting leverage limits for clients with <12 months experience to have the opportunity to trade for as a little as maybe £0.5 per point on spread-trading account. This would offer clients minimal risk at the same time offer the chance for newly developing traders to be nurtured through reduced risk once they feel they are ready to trade from a demo to a live, so almost like a step by step approach with a self-developmental process.

 

In a final note possibly be an idea in the future, that clients can chart their progress with wins/losses with each trade. So for example if you perform lets say 10-20 trades a week this would be charted with possibly a break down of wins & losses in each security traded and a general summary of overall progress

 

Overall it is a shame that the FCA announced this at a moments notice and hope a sensible approach is taken that favors both clients and trading firms and finally hope all goes well for the IG group as from a client prospective i am proud to have a very supportive brokerage team. 

[Caseynotes]

Over regulation will only push people to open accounts in other countries and be worse off than they are now. Leverage is precisely why people use spread betting accounts.

IG is right to point out the main problems in the industry are overseas companies with less regulation, these proposals will drive more new traders to these companies. I bet they can’t believe their luck, they won’t even have to offer a free pen (or whatever) to encourage people to sign up.

Most new traders do lose money and don’t survive the first year. Limited loss accounts and clear stats incorporated into a progressive learning facility would help but capping leverage for everyone else won’t.

 

[Caseynotes]

Daily Mail article sums it up, a tale of greed and naivety. Reveals the worst firms are not based in the UK and not subject to UK regulations. The Mail hack (who knows about markets) opens an IG demo Binary account and goes on to make every mistake in the book on way to blowing the account in one day, hilarious.

 

http://www.dailymail.co.uk/money/news/article-4030630/I-no-idea-pay-credit-card-bill-Mother-s-agony-losing-12-5k-trading-site-bid-send-sons-university.html

 

 

[donaldprice]

It is always the same, whenever any single business or company within an industry does something stupid, they automatically think every company is like that and this has happened over and over again in almost all industries. Regulation in general can always be helpful, but the problem becomes when it is extreme. And Casey that article below just summaries some of the clear ignorance and greed. Too many think trading it is as simple as 123. Your primary goal before investing or trading is risk management second is to make a profit. The problem is when you have certain individuals who have just finished watching a film or see an advert thinking trading is a way to make easy money. No such thing. None of them are prepared to put the effort in and do their homework and trade ridiculous sizes trying to double their account size. I dont know one single hedge fund, pro-fund, individual, institution that can make >8-12% in a year, let alone 50-100%.  I have been doing this now for over 5 years and still i am learning something new and my number one priority is how not to  loose money, not make it, that is a bonus. Risk management is key to survival. Just imagine if major institutions behaved this way, they would not have a single client left in a matter of seconds.

[Caseynotes]

Yes, the bright flashing lights gets them every time and the worst offenders dodge UK regulation anyway. And leverage, like any tool can misused, if you can boast massive returns you must be over leveraged and cannot survive the inevitable string of losers that probability dictates you must get. Seems we will all be restricted by regulation that will have no affect on the offshore rogue companies that promote bad practice.

[donaldprice]

We will just have to adapt to the new environment, we will have to wait and see what the FCA does and on what time scale.

[Guest Trader_1707]

,   these  your words are  the best  rational decision in this situation:  "To wait and to see what FCA will do and on what time scale"

 

[HannahL]

Hi , thanks for your comments.

 

Just to confirm, as binaries and options are forms of leveraged trading, these will fall under the scope of the FCA's proposal.

 

Please do keep your feedback coming!

 

Thanks,

Hannah

[HannahL]

Hi , thanks for your interesting feedback and comments here.

 

We do try to be as transparent as possible in terms of contract sizes and their conditions, and you will always find this information in the 'Get Info' drop down section of any deal ticket.  We could certainly look at trying to make it even more visible, and this is likely something we will revisit when the FCA clarify their intentions for firms.

 

Also, we do offer a reduced minimum bet size grace period for any new clients, so as to help the learning process and familiarise them with our platform.

 

We'll be able to give more detailed plans in the coming months!

 

Do keep your comments coming.

 

Thanks,

Hannah

[Guest Philstrading]

The only way this will effect retail traders/investors  with smaller capital is to make it impractical for them to trade and develop. For other more lucrative investors it will still restrict potential for trading/investing. You are essentially saying if you have only smaller amounts of money you can't trade, and only richer people should have that opportunity, essentially restricting the ability for the average guy to develop themselves by putting ridiculously large margin restrictions on and preventing them from trading due to insufficient funding and preventing the average guy from learning and developing capital for themselves, and in so doing further reduce the ability for the average person to have the opportunity to develop and make money in the industry.

 

As a Retail Trader I have come across quite a few people who lose substantial money in the markets, some are exploited by unscrupulous companies who will continue to do so irrespective of what you do, others have the gambling mentality and chase after money losing more and more as they go along. These sorts of people will be unaffected by the margin increases, often they are wealthy and can afford them and I speak from experience with other people not from a notional perspective.

 

I can say from experience that the increased margins do not affect those people who gamble in the markets. Gamblers will always be there and can be seen in all walks of life in the betting shops where my wife works spending their pay packets and credit cards to the tune of many thousands a day. The trading gamblers won't be affected just the retail traders with smaller accounts.

If the thought is to prevent people from losing too much money you would be wrong in assuming this would do anything of the sort. This will only make it almost impossible for the average person to train and develop themselves in this industry... the proposals are discriminatory to people with small amounts of capital where it will prevent them from entering trades and so be impossible for them to develop as traders.

 

The proposals do not reflect the ethos of the country to provide opportunity to all people, not just those with money. It is overly restrictive and won't address the issues for those who get exploited or who lose through having gambling mentalities. If you want to stop people losing money you will need to ban the right for personal expenditure on investments altogether. A person has a fundamental right to do what they want to with their money. There are already natural restrictions on trading as if you don't have the margin and capital to trade the risk the trade cannot usually be taken. All these restrictions say is you need to be lucrative with money in the first place and the average guy with small capital is not allowed to develop in the industry. Those trading in stocks or using the full capital won't be affected either I guess so what is being prevented, just the little guy with not so much capital getting on.

 

Bring this in and you are turning the country backwards to a more fascist regime of keeping the little guy at bay. The proposals are fundamentally flawed. You need to trade live to learn in the markets and can't do so on demo accounts, anyone stating that simply is not a trader or has little or no experience of trading.

 

Bring this in at the peril of the industry and more so the country.

[albertc30]

I couldn't agree more.

 

A mate has brought me over from another platform as he proved to me that it was really good this spread beating!

 

Today, we were both gutted and our initial thoughts were precisely that of your own.

 

The rich can play the game and become even richer but the poor cannot!

 

Rules made by the rich for the rich!

 

It's appalling that someone thing it's acceptable to risk £4k+ for a return of £10 per pip!!!

 

I for one will be trying to make as much ROI as I can till such rules come in to play. Once they do, I shall be closing down my account and moving somewhere else and continue with my CFD's.

 

I wouldn't be surprised if this is not an effort from governments behind the curtains to push smaller traders into say CFD's where we MUST pay taxes. Yet the whales will be happily playing the game and be exempt of taxes.

 

Honestly!

[Caseynotes]

This is a Euro wide (ESMA) instigated reform (MiFID II) a process started years ago that seeks to add transparency to the industry and try to protect smaller businesses and traders and which has, typically, lead to loads more bureaucracy. There is period for public consultation which we were invited to participate in on this forum last year. The latest update on the forum was posted just a yesterday and concerns your, and all our, main concern re; amount of available leverage.

 

 https://www.esma.europa.eu/press-news/esma-news/esma-consults-potential-cfd-and-binary-options-measu...

 

https://community.ig.com/t5/IG-Trading-Support-and/FCA-and-ESMA-crackdown/m-p/20203

 

 

 

 

 

[Guest Philstrading]

Well I did post mine off verbatim as per my post, before I posted it here infact.. If implemented it will stop many new traders entering the industry due to the financial restrictions, which to some extent the industry needs..

[HannahL]

Hello all,

 

We just wanted to remind you to have your say and give your feedback on industry proposals by 7 March, so that the FCA has a full picture before making a decision.  Please see our original post for full details, or post any questions here.

 

We're completely behind the move to raise conduct standards across the industry, but we believe that our clients would be better served by keeping leverage limits proportionate, and offering measures such as limited-risk accounts.

 

Please do share your views here.

 

Thanks for all input as always!

Hannah