IG Group Holdings PLC (LON:IGG) has been downgraded to ‘Sell’ from ‘Hold’ by City broker Shore Capital over concerns of additional regulatory risks.
Analysts said while the FTSE 250 spread-betting firm had reported a strong set of full-year results at the end of July and was “well prepared for the tighter UK/EU regulations of [contracts for difference]”, mitigating actions taken by its higher value clients to avoid the new restrictions could have the opposite effect.
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“Our concern is that that if mitigation is seen as too successful then investors need to step back and remember why this tighter regulation was introduced, i.e. to stop the vast majority of retail clients using such products suffering poor outcomes in what is an investment product governed by financial regulators,” the broker said.
Regulations came into force on 1 August 2018 that banned binary-based products (a bet based on a simple ‘yes’ or ‘no proposition) for retail clients, in addition to negative balance protection (limiting losses to the money available in a trading account) and restricting leverage available to retail clients for new positions to between 30:1 and 2:1.
Many of IG’s clients have sought to dodge these regulations by registering as professional investors, thus no longer being simply ‘retail’ clients, however, Shore Capital voiced concern that this migration could keep the regulatory spotlight on the sector and attract additional rules around ‘professional’ designations.
Despite the downgrade, the broker left its fair value for the stock at 800p.
In mid-morning trading, IG’s shares were down 2.1% at 899p.