Policing the markets

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.

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.