FCA Publishes Estimated Broker Losses Due to CFD Restrictions

The UK Financial Conduct Authority (FCA) assessed the impact of CFD leverage limits on firm’s profits by reviewing the earnings and revenue estimates from sell-side analysts for two UK based CFD firms before and after the implementation of ESMA’s temporary measures. Today the FCA published the results of the assessment which showed a reduction in net income for these two firms for the financial years 2019 – 2021 is close to £17 million per year on average. This represents a 6.7% decline in net income (around 6% for the first firm and 10% for the second).

Since firms’ business models differ, scaling up this loss of net revenue for the whole market will not yield a precise estimate of CFD firms’ total loss of profit. In light of this, the FCA calculated lower and upper bounds for the estimates for the remaining CFD firms based on the expected decline in net income of 6% and 10% for these two firms. The corresponding reduction for all firms is therefore approximately £38.5 million and £55.3 million.

The restrictions introduced by the FCA go further than ESMA’s by applying to a wider range of products by including CFD-like options, and limiting leverage for CFDs referencing certain government bonds to 30:1 (compared with 5:1 under ESMA’s measures).

If the FCA estimates are accurate we believe that the impact on revenue specifically for Forex and CFD brokers domiciled in the UK is significant when comparing the losses to the overall annual revenue that is reported by some brokers. Nonetheless, preliminary revenue figures for 2019 from Plus500 show that CFD restrictions may not have played that big of a part in impacting revenue last year.