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Enhanced regulatory environment set to fundamentally disrupt CFD trading industry

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Regulations proposed by the FCA, as well as added pressure from measures introduced by ESMA, designed to provide better protection to retail investors in CFD trading will force dozens of brokers out of business.

This is the view of Ivan Gowan, CEO at fintech company Capital.com, who says that the FCA’s requirement for higher levels of capital and the lower leverage limits imposed by ESMA will undermine the business models of many CFD trading providers, rendering them unable to compete in a fundamentally reshaped market, to the benefit of retail investors.
 
2018 has seen increasing scrutiny of the CFD trading market. Gowan believes that ESMA’s measures, which come into force on 1 August, will enforce a number of changes to CFD trading that will help users to manage their risk and trade more sustainably. These measures include negative balance protection to prevent traders losing more money than they invested, with the additional protection of an individual trade closeout rule, and stipulated maximum levels of leverage which reflect the volatility of each asset class. In addition, the FCA is considering forcing straight-through processing (STP) brokers to upgrade to full IFPRU 730K licenses, to ensure these companies have the capital to cover negative balances from prospective client losses.
 
Gowan says: “The regulations introduced by ESMA are all broadly sensible, which Capital.com has already implemented, and will provide greater protection to retail investors. The recent announcement that the FCA will force brokers to upgrade from a 125K license or stop on-boarding retail clients, due not being able to cover client negative balances, will affect 23 CFD firms in the UK alone. We believe that many brokers will have no choice but to leave the market in a few months and traders will need to choose a new provider.”
 
“This is a hugely positive development for retail investors. The CFD trading providers that will struggle to operate in this enhanced regulatory environment are offering investors unsustainably high risk, and if they cannot survive in a market that works better for the consumer, then the market is better off without them. Retail investors should be able to trade with greater confidence following the implementation of these measures, knowing that they are using a platform that puts their success at the heart of its offering and reduce their risk.”
 
“While these measures are a fantastic starting point for retail investors, truly responsible CFD trading providers should be focusing on educating their customers as much as possible, to help them improve their trading skills and give them insights on the markets they are interested in. We want our users to enjoy trading CFDs, and we believe that the best way to ensure this is through delivering a great user experience and by helping them to trade successfully.”

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