There’s a lot of ‘chat’ among traders about how to get around these restrictions, by becoming registered as a professional trader or switching to an overseas broker.
So I thought we should take a look at the pros and cons.
First up, a word about how regulations are interpreted.
You may think that financial regulation would be nice and clear with unambiguous rules …
… think again.
There’s a huge amount of wooliness in the regulation. Phrases like ‘of a significant size’ (how big is that?) … ‘gives reasonable assurance’ (how much is that?) …
This is why brokers have a compliance team, who read these regulations and try to figure out how they’ll interpret them. Brokers want to make things as easy for their clients as they can, but they don’t want to find themselves caught on the wrong side of the rules, so they are walking a fine line. And – when it comes to the new regulations – they are testing the waters as much as we are.
What I’m saying here is … don’t expect crystal clear guidance on what you can or can’t do. Everyone is feeling their way here a bit.
So, can you become a professional client with your broker?
The requirements set by most brokers for this are that you must meet at least 2 of the following 3 criteria:
- you have carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
- the size of your financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
- you work or have worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.
The interpretation of ‘significant size’ has been adopted by most brokers as 40 trades of notional value of £10k for equity or £50k for anything else.
To dig a little deeper, the FCA requirements are …
Did you spot the bit about ‘investor compensation rights the client may lose’? It’s that ‘may’ word there.
So, if you’re a professional client and your broker goes to the wall – don’t count on being able to claim on the financial services compensation scheme (the scheme that protects the first £85k of any losses if the company fails.) Different brokers are giving different stories here. The only reliable answer is that you ‘may’ have some claim to compensation …!
So, what about going overseas?
A lot of traders are talking about taking their accounts overseas. And some brokers are gently nudging traders in this direction (whether they’re actually allowed to do this is another grey area, so some brokers are being bolder here than others).
The advantage is that, if your broker is outside the EU, they aren’t covered by the new ESMA leverage regulations, but there’s more you need to know before signing up to a foreign broker …
Where are they based?
A lot of these brokers are operating in territories with little regulation, like the Cayman Islands or Cyprus. If these firms go under or disappear, you’ll have little or no recourse.
But what about an Australian broker?
There’s a fair bit of misinformation being spread about on using an Australian broker for spread betting.
In Australia, there’s a Financial Claims Scheme, which – on the surface – looks a lot like the Financial Services Compensation Scheme that covers our brokers in the UK.
Your Aussie broker may be registered and regulated … but – as far as I’m able to ascertain – it’s not covered by the claims scheme (that’s limited to banks, building societies and credit unions).
So, just because an Australian broker looks friendly, and their platform looks almost identical to the ones you’re familiar with … please don’t think you’re trading with the same kind of protection.
I’m sorry I’m not able to give clearer guidance, but the reality is that no one really knows where the FCA will draw red lines – what they’ll let go, and what they’ll crack down on. Traders want the best deal possible … brokers don’t want to lose clients … but nor do brokers want to find themselves on the end of a hefty fine.
Please watch your step here, and don’t rush into putting funds into unprotected accounts.