Global regulators proposed a crackdown on the targeting of retail customers by financial spreadbet operators on Tuesday. They are recommending that such entities be licensed in order to prevent them from using loopholes which currently allow for exploits based on cross-border rules, as well as taking advantage of the less experienced laypersons trying their hand at this notoriously murky market.
The organisation speaking out on this topic, on this occasion, was the International Organization of Securities Commissions (IOSCO), who called for a crackdown on three types of trading – contracts-for-difference (CFDs), binary options, and rolling-spot forex (foreign exchange) contracts. They pointed out that these are often sold online without accurate (or indeed any) advice being offered, with the majority of retail investors losing money overall.
IOSCO further indicated that offering services across borders without a physical presence in all relevant jurisdictions was something which should stop. They concluded that many firms were putting out “misleading marketing messages” to boost retail investor uptake, and proposed limits on leverage (some firms were seen offering up to 2000-to-1 leverage) and licensing requirements for offering services at home or across borders. IOSCO intends to release a full report after a round of consultations on their proposals ends in March.
A consultation which ran in January for the European Securities and Markets Authority (ESMA) on a related recommendation, to reduce leverage options for CFDs to between 5 and 30 times the trader’s stake, received a huge 14,500 responses from the public, most of which voiced concerns over this adjustment, which would of course reduce both the potential upside and downside for traders significantly. ESMA only gained the power to put in place such regulations in early January of this year, and, even still, can only put in place changes which will be in effect for three months and then subject to further review quarterly.
One concern investors have is that this move will boost established lenders and throttle innovators in the market, as well as potentially motivating investors to access unregulated offshore accounts. The argument is that, while CFDs certainly have their share of risks, such regulative steps may drive investors into still more risky territory and have the opposite result to that intended.
