CMC Markets PLC (LON:CMCX) said today that it welcomed the “balanced approach” taken by BaFin, Germany's financial regulator, to new rules to curb the sale of contract for difference (CFD) products, the latest European watchdog to recommend a clamp down on the fast-growing industry.
BaFin said late yesterday that it intends to ban the sale of CFDs to retail customers if they include a so-called additional payment obligation.
Bafin chief executive director Elisabeth Roegele said: "In the case of CFDs with an additional payments obligation, the risk of loss for the investor is incalculable.”
She added: “For consumer protection reasons, we cannot accept that”.
Germany’s financial watchdog had already announced plans for the ban this summer.
READ: Spread betting firms tumble as UK regulator gets tough
In a statement reacting to the BaFin announcement, CMC pointed out that such a functionality - to ensure that retail clients cannot lose more money than is deposited in their account - is already available to CMC Markets clients in Germany.
The company added: “On the basis of the consultation paper, there are no other requirements from BaFin including no leverage limits, and where retail clients' risk is limited to their deposits, there is no prohibition on marketing, distribution and sale of CFDs.
“We welcome this balanced approach from BaFin and will respond to the consultation in accordance with the proposed timeline of 20 January 2017.”
CMC is the leading provider in Germany and has had the largest retail CFD market share, based on the latest independent Investment Trends research, since the start of the study in 2011.
Plus500 sees no effect
Meanwhile smaller firm Plus500 Ltd. (LON:PLUS), a leading online service provider for retail customers to trade CFDs internationally, also welcomed the announcement made by BaFin this morning.
It said that “all its accounts have always had balance protection, meaning the client cannot lose more than the value of their account.”
Plus500 added: “The company therefore believes that any limitations imposed by BaFin in this respect will have no effect on its business.”
CFDs let investors bet on both the direction a share price, currency or other financial product will move, and the extent of the change in price, and there is no stamp duty.
The industry is regulated by European Union rules, which have no caps on leverage. That means investors can take out bets that are far larger than their initial outlay, offering greater potential returns but also running the risk of huge losses.
An additional payment obligation forces investors to pay for losses that exceed the balance of their CFD accounts from their other assets, thereby transferring the risk to other market players.
Thursday's move by BaFin came after three UK-listed spread betting companies – CMC, Plus500, as well as IG Group PLC (LON:IGG) - saw their share prices plunge by more than a third on Tuesday after Britain's Financial Conduct Authority said it planned to bring in new rules for the sector.
In early trade this morning, shares in all three firms were higher, marking more of a short-covering bounce than an rally on the perceived benign nature of the German regulators' proposals.
On the FTSE 250 index, CMC saw its shares gain around 2.5%, or 2.7p at 108p, while IG Group added 1.0p at 479.8p, and AIM-listed Plus 500 rose 3.4 per cent, or 12.25p to 375p.
IG Group considering implications
IG Group made its response to the BaFin announcement late yesterday, pointing out that they considered the “proposal to be consistent with IG's recent introduction of Limited Risk Accounts, which guarantee that a client cannot incur losses in excess of the amount deposited in their account.”
They added: “IG will carefully consider the full implications of the BaFin announcement and will be seeking to meet with BaFin before responding to the consultation, in accordance with the timeline provided of 20 January 2017.”
CFD products such as spread bets and rolling spot foreign exchange products resulted in losses for 82% of clients, the UK regulator said. on Tuesday.
Trading on margin, where a customer is only required to put up a fraction on the total investment, in particular is set for much tighter control.
Retail clients who do not have 12 months or more experience of active trading in CFDs will now have maximum leverage of 25:1 with a 50:1 maximum for all retail clients.
Health warnings, a disclosure of profit/loss ratios and banning the use of offers to entice customers to open new accounts are other measures proposed,
Christopher Woolard, the FCA's executive director or strategy and competition, said: "We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses.
"We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products."
The FCA’s tougher stance followed a new set of regulations introduced by the Cyprus regulator last week and is part of a trend towards tighter regulation globally.
-- Updates with share prices, clarification of CFDs --