FCA Expects up to £55m Drop in 2019-21 Profit for UK CFD Firms

The Financial Conduct Authority (FCA) has published an impact assessment this Thursday which examines how the regulatory restrictions on contract for differences (CFDs) offered to retail clients are impacting the sector.

Overall, the British regulator expects that firms offering CFDs to retail clients in the UK will see a reduction in profit of between c. £38.5 million and £55.3 million from 2019-2021. 

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This range is based on information collected from reviewing two UK based CFD firms before and after the implementation of ESMA’s temporary measures. Although not named in the assessment, the FCA highlighted that the two firms together contributed 43 per cent to the UK CFD market based on client money.

For these two firms, the British watchdog said that the reduction in net income for the financial years 2019 – 2021 is close to £17 million per year on average. This represents a 6.7 per cent decline in net income (approximately 6 per cent for the first firm and 10 per cent for the second).

The CFD rules introduced by the FCA limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset, make negative balance protection mandatory and also require a standardised risk warning, among other restrictions.

Furthermore, the UK regulator’s restrictions go one step further than ESMA’s as they apply to a wider range of products. Namely, CFD-like options fall under the restrictions, and leverage for CFDs referencing certain government bonds has been limited.

FCA: CFD providers faced little implementation costs

Besides a reduction in revenue, the authority found that there were little one-off implementation costs for CFD trading providers, as, by the time the FCA implemented its restrictions, firms had already been subject to ESMA’s measures, which were mostly the same, so the damage had already been done.

In terms of negative balance protection and risk warnings, the regulator found that there would be minimal on-going costs.

“Consequently, in our cost benefit analysis we explained that ongoing costs to firms would be nil. Whilst some firms suggested that there would be additional costs from requiring firms to display a risk warning at the top of the webpage, we did not receive any quantification of these costs. Because the net benefits of this measures are far greater than the expected costs, we do not think it was proportionate to assess these costs,” the FCA said in its assessment.

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