The UK’s Financial Conduct Authority revealed the results of an impact study concerning the regulation that restricts the offer of contracts for difference (CFD) to retail traders.
The rules limit the leverage between 30:1 and 2:1 depending on the volatility of the underlying asset, provide for an automatic closing of a trader’s positions when his funds fall to half of the margin necessary to keep the positions open on his or her CFD account, and provide protections that guarantee that a client cannot lose more than the total funds in his trading account. The restrictions introduced by the FCA also go further than those of the ESMA.
According to the document, the FCA has assessed the impact of CFD leverage limits on broker profits by examining the profit and revenue estimates of sell-side analysts from two UK-based CFD companies before and after the implementation of the temporary ESMA measures. The FCA used this information because it was the only information publicly available to assess the expected impact on brokers’ profit losses.
The FCA believes that the information from these companies is representative of the UK CFD market because they represent 43% of this national market. The FCA recognises, however, that this data can lead to overestimation, as companies can compensate for declining profits by reducing costs, such as marketing fees and variable compensation, and some companies expand into other jurisdictions that aren’t affected by the rules.
The reduction in the net profit of these two brokers for the financial years 2019-2021 is close to £16.9 million per year. This represents a 6.6% drop in net profit.
Brokers also suggest that the restrictions on CFD options will also disrupt operations. Although the regulator requested this information, these brokers did not provide a cost estimate.
Since the business models of these companies differ, the increase in this loss of net income for the whole market will not give an accurate estimate of the total loss of profit of CFD brokers. This is why the FCA calculated the lower and upper limits of the estimates for the other brokers based on the expected fall in net income of 5.9% and 9.8% for these two brokers. The corresponding reduction for all companies is therefore somewhere between £38.6 million and £55.5 million.