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European financial regulators begin to flex new powers in January. Their prerogatives will include deciding how much of the financial derivatives industry that serves individuals should survive. IG Group, a UK broker and spread betting group, says it has no idea what the impact of the as-yet nebulous regime will be. What is clear is that simple steps to protect the credulous can and should be taken.
For instance, Mifid II rules for brokers require marketing to be targeted at an appropriate audience. Contracts for difference are complex financial products, which magnify losses and the impact of trading commissions. They are easy to trade only in the sense that a child with a smartphone can navigate the interfaces required. Small movements in stocks and currencies can rapidly part punters from their money. The appropriate market for such products is small, rich, and well-informed.
Lawyers might argue a wide net must be cast to catch these whales. Enforcers should take a hard line. The shirts of professional footballers should not bear the names of companies offering such dangerous financial products, for example. This is a means of advertising to millions, not the 1 per cent.
Other changes should police direct relationships with potential customers the moment they begin. A ban on sign-up bonuses, and a requirement for large minimum account balances, would deter unwary dabblers. Leverage can be capped.
Prominent warnings should disclose the proportion of customers who lose money and the amount they typically forfeit. This information would be instructive. Regulators have found that most users of highly speculative financial products lose money.
Companies like IG, which say their products serve a genuine need for well-heeled folk who want to invest with added leverage, should be fine. The days of bucket shops legitimised by lax regulation, however, should be numbered.
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