Banks vs FCA: Where Do UK Spread Bettors Stand?
The Financial Conduct Authority (FCA) completed an extensive 6-year forensic study of the contracts for difference (CFD) market in the United Kingdom. According to the findings, multiple instances of improper conduct were reported in the industry. The FCA believes that stricter regulatory constraints need to be implemented to protect retail clients from the predatory actions of various brokers. CFD companies (derivative trading companies) had been identified as a potential weakness in the UKs financial trading spectrum. Owing to increased scrutiny of spread betting operations in the United Kingdom, Saxo Capital Markets has abandoned the CFD & FX Association of the United Kingdom.
Saxo Bank Group Splits from CFD and FX Association
Spread betting companies have faced tremendous pressure in the financial markets as a result of the FCA clampdown. The share prices of major banks involved in derivatives trading have plunged, as fears mount. The news from Saxo Bank Group is particularly distressing, since the stance adopted by this bank is one that is strongly in support of the FCAs stringent regulations. Now, Saxo Bank has completely withdrawn from margin trading, and embraces enhanced consumer protection protocols. The founder and chief executive officer of Saxo Bank, Kim Fournais indicated that the UK’s CFD and FX Association were no longer in agreement with Saxo Bank Group’s interests.
According to Fournais, ‘… Trading contracts for difference in foreign exchange instruments brings a number of advantages to retail investors that have previously been the preserve of larger financial institutions… Trading these instruments also carries risks that should not be neglected and warrant high industry standards and fair regulation.’ Saxo Bank wants to project the image of a responsible financial institution, and has opted to side with the FCA, fearing a clampdown on its business operations, and overall profitability. The 180° turnaround is attributed to the bank adopting a prudent approach to leverage, which was as high as 200:1 in the UK, but has now been dramatically lowered in recent proposals.
FCA proposals take aim at ‘Binary Bets’
According to the FCA, leverage will be lowered to novice retail clients (those with less than 1 year of experience in active trading of contracts for difference) at a maximum leverage level of 25:1. Retail clients will enjoy a maximum leverage of 50:1, but lower leverage levels will be adopted across all asset classes after the FCA proposals are introduced. Retail customers in the UK have been enjoying leverage of 200:1 in what the FCA describes as irresponsible and reckless behaviour on the part of financial institutions.
Part of the problem according to the FCA is that there is inadequate transparency and understanding of the market. The FCA believes that many of the spread betting products currently on offer are similar to gambling operations. The current proposals are being identified as a means of enforcing discipline in the industry, mitigating risks, and protecting the interests of clients. There is some doubt about the nature of binary options trading as a viable investment option.
UK CFD Brokers Stand Behind Lobbying Group
Saxo Bank is currently based in Copenhagen, Denmark. It is a multi-asset brokerage with UK operations – Saxo Capital Markets UK Limited. The FCA proposal to limit leverage to 50:1 is also aiming at removing client bonuses and promotional offers that entice retail traders. Other CFD trading brokers currently supporting the CFD and FX Association are hoping to increase the leverage proposal to 100:1, which is half of the currently accepted 200:1 leverage level.
However, this is unlikely given that in Europe, CySEC (Cyprus Securities Exchange Commission) has adopted a soft leverage cap as well. The majority of UK online brokers are fully behind the lobbying group, and they will continue fighting as a united unit for regulated trading activity in CFDs and FX trading.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.