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SHAPESHIFTER: WHAT THE PAST 10 YEARS TELLS US ABOUT THE NEXT DECADE FOR THE CFD INDUSTRY

CFD

Robert Berkeley, CEO of Infinox

 

Rare is the company that marks a successful decade in business by pressing the reset button and looking for an entirely different type of customer.

But that’s exactly where we in the CFD industry find ourselves, after an unprecedented period of increasing regulation that has eclipsed the scale of intervention seen in other sectors.

These are intriguing times, and we already know the sector will look radically different in another 10 years.

But how different? To understand why the process of evolution is set to continue, it’s worth reflecting on how we got to where we are today.

The regulatory revolution for CFDs has been swift. CFDs won a massive audience around the globe thanks to the leverage they offered to a broad church of investors and traders keen to increase their exposure without increasing their risk capital.

However with that success came unexpected issues, as customers were attracted from both ends of the spectrum. Many sophisticated retail investors, who were already familiar with the stock market, began to embrace the way CFDs could help them turn the same amount of money into a greater number of investments with lower trading costs. So far, so uncontroversial.

CFD

Robert Berkeley

More and more firms sprang up with ever more sophisticated trading platforms.

Simultaneously, as the world of spread betting pulled in those who were newer to financial markets but still fascinated by them, many of them eventually graduated to CFDs once they felt they had grown in skill and understanding. These clients knew CFDs were favoured by professional speculators because of their tax advantages and saw CFDs as a natural next step. But some of those attracted to the industry were less experienced than they might have been and proved hard to engage in education.

The industry, as it sprang up in the early 2010s, was not to last. And if we are honest with ourselves, the industry could have done more to keep in step with regulators. Most CFD providers think the leverage ceilings now imposed in developed markets by the EU’s ESMA rules are too draconian, but how much higher they might have been if the sector had embraced voluntary caps earlier is still a matter for debate.

And so it was that, at the end of the last decade, this hugely successful sector had its wings clipped as regulators capped the amount of leverage available.

Their aim was to protect those investors who they feared would either not seek out the right knowledge or overleverage themselves — or both.

Regulation certainly has brought with it unintended consequences. The main one is the way tighter regulation in home markets has pushed some investors and traders into far-flung corners of the world where they might be more vulnerable to bad actors taking advantage of weak regulations and oversight.

Rumours have also circulated that the industry can no longer survive in home markets but this is unfounded and firms like Infinox — currently celebrating its tenth anniversary — are proudly staying put.

The reality is actually more nuanced than that.

If the sector is to continue to thrive, the problem is an obvious one — regulation has changed the character of who our customer is. If clients cannot trade at 200:1 and the business models that were designed around these customers are redundant, then it is the business model that has to evolve.

We have to move with the times and the customer of the future will no longer be trading at more than 30:1. The industry has to deal with that.

So if a highly leveraged trader is the customer who defined the past 10 years, who is going to define the next decade? The answer brings us to probably the most interesting unintended consequence — a mass-market future for CFDs.

The true mass-market has scarcely been courted until now, for the simple reason that the industry didn’t need to. But a core of stock market investors who have already discovered the advantages of trading shares using CFDs already exists, and these clients are not that concerned about leverage caps.

They are financially sophisticated, they remain customers for years, if not decades, and they love the technology on offer that they can’t get from traditional share dealing accounts.

There are many millions of them, they live conventional lives and they are also easy to bring through the KYC process.

These people must be the CFD clients of the future who will help the sector operate within an increasingly complex regulatory framework. Greater numbers of customers who are more loyal will also help providers overcome another problem that has grown in size over the past decade — the cost of RegTech.

Most providers turn to technology to meet the KYC and anti-money laundering challenge, knowing if they don’t get it right the punitive costs could be devastating. But they’re not cheap and there is no scope to deviate from a regulatory framework that is being shaped not by genuine investors but by financial crime.

Broadening the customer base will be the best way for the CFD business to plug the hole left by the leverage cap, which the FCA itself estimates will dent providers’ profits by up to £55.3million.

The sector has been told it has a new customer base and it’s now up to companies to go and find them. That’s going to take time but it’s not impossible. Far more consumers are investing and trading than ever before and customers using less leverage are likely to show greater loyalty.

Short-term gains will gradually be replaced by long-term aspirations with lower risk. This is actually something that our educational offerings can much more easily support. Clients’ success rates will inevitably rise, and with it the lifecycle of the typical customer will grow longer, much as it does now with traditional stockbrokers. These clients of the future won’t miss the high leverage, because they never had it.

A seismic change has torn up assumptions the CFD industry thought it could rely on only a few years ago. Reorientation beckons and the sector has its work cut out, but it’s not mission impossible.

Soon we’ll bridge the divide between the present and the brave new world by using a combination of innovative products, greater integration and more intuitive education.

 

Wealth Management

THE END OF YEAR TAX CHECKS THAT COULD SAVE YOU THOUSANDS

Charlie Reading, Founder and MD of Efficient Portfolio

After HMRC’s tax return deadline at the end of January, it can be tempting to drop your guard, believing that your new tax bill is a long way away.

It’s true, you’ve got a whole year until the next bill is due. What most don’t consider, however, is that there is a range of checks that you can do reduce that bill significantly.

Astute investors make use of their tax-free allowances every year and save thousands of pounds in the process. With such massive savings on the line, it’s a strategy to certainly consider.

With that, here are some easy checks and tips from Charlie Reading, Founder and Managing Director of Efficient Portfolio chartered financial planners, that could start you on your way to a much leaner tax bill:

 

Charlie Reading

1. Maximise Your ISA Allowances

Good returns, flexibility, diversity and tax efficiency should be key components in your financial strategy, and the ISA helps to deliver all of these. Historically, ISAs have been at the cornerstone of tax-efficient saving and are often referred to as one of the essential steps in your strategy, as they can help your wealth grow without you being penalised by heavy tax charges. They are an incredibly useful way of saving, and, as such, it is generally encouraged that people take advantage of their benefits. However, the ISA allowance is offered on a ‘use it or lose it’ basis, so if you fail to maximise it, you can’t make up the funds later on.

Up until 5th April 2020, you can contribute up to £20,000 into an ISA, and a further £20,000 from 6th April 2020, thereby sheltering up to £40,000 per person, as long as you’re over 18.

 

2. Top Up Your Pension While You Still Can

At the time of writing, the highest level of State Pension you can receive is £129.20 a week, which is frankly a paltry sum to live on. That’s why saving for the future is so important. It might seem wise to enjoy life now and worry about retirement later, but you’d only be damaging your future quality of life.

Pensions are a highly tax-efficient way of saving and now offer a great deal of flexibility in retirement, as when you retire you can gain access to 25% of your pension pot as a tax-free lump sum, with the remainder taxed at your marginal rate.

The current pension annual allowance is set at £40,000, so if saving for your future is a priority, it is worth investigating which pension is right for you, sooner rather than later.

 

3. Protect Your Estate from Tax

Inheritance Tax (IHT) is a concern for people from all walks of life. If you are hoping to leave a legacy to your loved ones, the last thing you would want is for that legacy to be taxed at 40% and lost to the Government.

One simple way of combatting this is to consider using your annual IHT allowance. During your life, you are allowed to give away £3,000 per year without incurring any IHT charges upon your death. There are of course downsides to this, in that you lose all access and control over the money, but it may be a tax-efficient strategy to consider.

 

4. Don’t Overpay Your Capital Gains Tax

The final tax consideration at this time of year is Capital Gains Tax, which is also given on a ‘use it or lose it’ basis and is currently set at £12,000. The issue of Capital Gains Tax is most acute if you hold investments which have grown above your tax-free allowance.

To ensure you make the most of your Capital Gains Allowance, it is generally recommended to sell down a portion of your portfolio to realise the growth made, but only enough to maximise your allowance, is the most prudent strategy.

These funds can then be used to fund any outstanding allowance on your ISA, for example. The advantage of doing so is that by placing your money from a taxable to non-taxable environment you have the potential for further growth, and you benefit in the longer term by potentially reducing a future bill.

There’s plenty of time left before the taxman comes knocking once again, but there’s no better time than the present to start looking into how you can save you and your business thousands of pounds simply through tax allowances you might not have previously been aware of.

 

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HOW TECHNOLOGY IS FUTUREPROOFING STOCK MARKET TRADING

stock market

Tony Shaw, Executive Director, London Office and Head Sales UK & Ireland at the Swiss Stock Exchange

 

Markets are shifting, there’s no doubt. Amid all the disruption and volatility from the past year, the Swiss Stock Exchange asked traders about what they expected in 2020 and beyond in our industry survey. The findings point to a rise in digital to help traders content with external forces.

 

First and foremost, traders are enthusiastic about what digital assets can offer.

Two thirds of traders polled said they’d had a marked rise in interest from their clients for digital assets and crypto-products. Given the interest, traders are increasingly bullish about the potential of these products – so much so that 80% have predicted an increase in overall demand in the long term. Market users believe these assets will help generate cost synergies and streamlining trading and settlement processes by creating efficiencies and ultimately reducing costs.

Our 2019 results reflect what traders have told us when it comes to digital assets and products. Last year, we saw significantly higher trading volumes from products with crypto currencies as underlyings. Overall volumes grew by +8.5% over 2018, but the increase in crypto products alone was +17%, reaching CHF 518.2 million ($534.54 m). There was a year-on-year increase in the number of transactions, as well (+21%): 19,636 trades in total.

The potential digital assets hold is clear – evidenced by the building of the SIX Digital Exchange (SDX), a fully integrated issuance, trading, settlement and custody infrastructure for digital assets.

According to traders, artificial intelligence (AI) is expected to bring further benefits to market operations.

Two thirds of our survey respondents anticipate AI will create more opportunities for the traditional equities business, while a similar number expect it to reduce the cost of trading. Innovation in AI is already – and will continue to be – a key driver in making our industry more effective at withstanding future risks and challenges both within and beyond the market itself.

In Europe, there is growing momentum behind calls for shorter trading hours – this trend was reflected in our survey as well.

Industry groups such as the Investment Association are advocating for stock market trading hours to be cut from 8.5 to 6.5 hours to open the industry to working parents and women who cannot commit to such long workdays. We found traders were largely supportive of this, with many saying that it could even facilitate operational benefits. The roll of AI is clear here in improving efficiency while minimising time wastage: 36% of traders said the introduction of shorter trading hours would prompt greater market liquidity.

Beyond the market itself, geopolitics continue to shape wider market sentiment.

It comes as no surprise that four fifths of traders said their strategies have been – to some extent – influenced by Donald Trump’s tweets. Interestingly, only 39% of those polled viewed Brexit as an influencing factor in trading activity, while three quarters believe the US election will drive trading activity in 2020 and 65% acknowledged trade wars would also have an impact.

More broadly, traders are split on the state of the global economy – 58% are bracing for a global recession while 42% predict stable macro-economic conditions over the next three years. What seems clear is that whatever happens in the wider economy, traders are making headway with new technologies that can improve their strategy, efficiency, and overall market health.

 

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