LONDON • The European Union's securities watchdog said it will ban binary options sales to retail clients and restrict the sale of Contracts for Differences (CFDs) to protect investors from significant losses, knocking shares in Britain's spread-betting firms, including IG Group and CMC Markets.
The European Securities and Markets Authority (ESMA) said yesterday that it was prohibiting the marketing, distribution and sale of binary options to retail investors, while its restrictions on CFDs would affect their marketing, sale and distribution.
Binary options and CFDs are financial products that give an investor exposure to price movements in securities without actually owning the underlying assets such as a currency, commodity or stock.
"ESMA, along with national competent authorities, concluded that there exists a significant investor protection concern in relation to CFDs and binary options offered to retail investors," it said in a statement. "This is due to their complexity and lack of transparency."
ESMA has said it is concerned about how these inherently high-risk speculative products are offered to retail investors, potentially leading to significant losses. In December, it flagged plans to ban their sale, sending shares of spread-betting firms tumbling.
Analysis on trading in the EU showed that up to 89 per cent of retail accounts typically lose money on their investments, with average losses per client ranging from €1,600 to €29,000 (S$2,600 to S$47,000), said ESMA.
IG Group, which was founded in 1974 as the world's first spread-betting firm, said it was "disappointed" that ESMA had imposed leverage restrictions, adding that this would risk pushing retail clients to providers based outside the EU, resulting in poor client outcomes.
It added, however, that while the measures announced by ESMA relate only to retail clients, its client base was dominated by sophisticated traders.
IG expects its revenue in financial year 2019 to be lower than that expected this year, primarily reflecting the impact of the regulatory changes in Britain and the EU.
Despite facing uncertainty from proposed regulation on these products, IG and its rivals have reported revenue growth recently as they signed up record numbers of customers, partly due to the boom in digital currencies such as bitcoin.
CMC said binary products generated £2.1 million (S$3.9 million) of revenue from Britain and Europe in the first half of financial year 2018, and a reduction in revenue would be immaterial for the group.
However, the firm said margin changes were likely to have an impact on how clients trade, although it was not possible to quantify the impact at this stage.