CFD Trading Firms Play Hardball with the FCA

Ever since the FCA (Financial Conduct Authority) decided to clamp down on CFD trading enterprises in the United Kingdom, the industry started lawyering up for a battle royal.  Since the FCA made its decisions to crack down on trading companies offering high leverage, bonuses and promotional offers to UK residents, many of the leading brokers are now pooling their talents and fighting back. Soon after the FCA decided to limit trading bets to retail investors, some 2,500 official responses have been received.  This is far greater than what the FCA typically receives during its consultation review process.

A global move to clamp down on certain aspects of CFD trading in Europe has moved across the English Channel to the United Kingdom. At the heart of the issue are the high levels of risk that novice investors and traders face with CFD trading. The FCA is concerned that newbie traders may lose a substantial portion of their trading funds, owing to poor decision-making processes, a weak understanding of the markets, and lofty promises of high returns by unscrupulous and unregulated brokerages. Unfortunately, it’s the regulated UK brokers that are bearing the brunt of it.

400: 1 Leverage – a Boon to Some and a Curse to Others

CFD trading is unique in many ways. For starters, traders do not purchase the underlying asset – they simply speculate on the future price movements of that asset. This is true of individual stocks such as Google, Apple, Facebook, Twitter, Goldcorp, and a range of commodities, currency pairs, and the like. The benefit of CFD Trading, and an attractive one at that is that there are no capital gains taxes on profits that are generated. Further, there is no stamp duty in the UK. This is a big benefit to traders who are otherwise subject to high fees on profits generated from trading activity.

Prior to the FCAs rulings, leverage of 400:1 was available on select assets, which is beneficial to traders who understand the markets, but can be detrimental to those who do not. While some believe that the strong response from the CFD trading industry has been orchestrated, others are of the opinion that UK traders should be able to enjoy a wide range of trading activity, provided they operate in a safe and secure manner. The number of complaints exceeds the standard response from consultation papers (anywhere from 10 responses to 150 responses) by a long margin. Among the many proposals put forth by the FCA include limiting leverage available to new traders, and removing bonuses and promotional offers as enticements to new traders.

Billions of pounds shaved off the FTSE 250 index

The FCA decision to limit the actions of CFD traders has had a dramatic effect on market activity. Major CFD trading companies such as CMC markets, Plus500 and IG Group lost billions of pounds since December. What is interesting to note about the many letters inked to the FCA is that they are individually based, and not written as a collective admonition of the FCA suggestions. In the UK, some 97 companies have been authorized to operate by the FCA. According to the latest statistics, some 125,000 active clients regularly trade CFDs in the United Kingdom, and that number is among the highest in a developed economy.