Policing the markets

With the collapse of global trading giant MF Global fresh in people’s minds, Rob Langston considers the impact forthcoming regulation will have on the retail trading market


Recent catastrophic events in the global financial markets and banking community have led to the introduction of sweeping changes in regulation over the coming 12 months.

While retail traders are unlikely to be aware of the many changes taking shape around them, there are likely to be implications for all sides.

Angus Campbell, head of market analysis at London Capital Group, says the break-up of the Financial Services Authority into two new bodies - the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) – may create a level of uncertainty about how the industry is regulated.

“The main concern for the industry will be the new FCA’s power to oversee the way products work. This could lead to the regulator being able to change a firm’s processes and possibly even the entirety of their operations,” he says.

If it follows in the footsteps of the Financial Services Authority, which has upped enforcement action since its inception, the new regulator is likely to be watching retail trading companies closely as it seeks to make its mark. The good news is that, compared to other financial services sectors, the number of complaints received by the Financial Ombudsman Service (FOS) about spread betting, foreign exchange (forex) and share dealing companies is low, in the grand scheme of things.

Proposals for a Financial transaction Tax could pose one of the biggest threats to retail traders, although this has so far been resisted by prime minister David Cameron

In its annual report last year, FOS revealed it had received just 219 new complaints on spread betting in the year to March 31 2011, up slightly from the 191 during the previous year. Spread betting complaints made up the majority of those made about derivative products.

European regulators are also keen to keep a close eye on derivatives market. The newly created European Securities & Markets Authority (ESMA), established last year, continues to pump out consultations on how to better regulate the market.

Proposals for a Financial Transaction Tax - or Robin Hood tax - would, perhaps, pose one of the biggest threats to retail traders, although this has so far been resisted by Prime Minister David Cameron. The Global Financial Markets Association trade body estimates that the tax proposals could increase forex trading costs alone by up to 18 times, should they come into force.

Bharat Samani, group head of compliance at CMC Markets, explains: “The European Commission has proposed a potential tax payable from 2014 onwards at 0.01 per cent of the notional amount on derivative contracts. Obviously, if this tax goes ahead, it will have  significant impact on the entire financial services industry in the UK.”

Similarly, any move to change the current tax regime may affect spread betting customers, who do not pay stamp duty.

On an operational level, the Financial Services Compensation Scheme could pose difficulties if it decides to meddle in the retail trading market. In the wake of several investment crises in recent years, such as Keydata or Arch Cru, spread betting firms have been asked to make increased contributions to the scheme designed to protect consumers.

Oliver Basi, senior lawyer at CMC Markets, says: “We know that the regulatory focus over the next 12 months will place an emphasis on increased transparency for all financial institutions, better investor protection and firms being subject to increased regulatory supervision and intervention.”

The recent collapse of MF Global will also put the spotlight on protecting client money and ensuring it is returned quickly, with investor protection high up on the agenda for regulators, says Mr Basi.

The new Markets in Financial instrumentation Directive (MiFID) regulations will also include further protection for investors and will give regulators the power to ban some financial products outright. However, MiFID II proposals are not set to be adopted until 2015.