Analysis: EU Regulation Uncertainty Is Now Officially Over

The past two years have been anything but calm for the brokerage industry. Last Friday, the period of turmoil officially ended. The FCA announced that it is proposing to make the temporary restrictions on CFDs permanent. Long-term stability for EU regulation is now an official fact. 
If there are any doubts about what EU regulators will do, allow me to remind you how all of this started. Back in December 2016, the FCA was the first regulator to hint of a major change coming to the retail brokerage landscape.
At the time, the UK authority issued a consultation paper proposing the changes that took effect in August 2018. The experts from the FCA have been following the industry closely for a time before identifying what are the main risks that regulators need to address.
Since the goal of the EU regulation from day one has been to “enhance consumer protection”, the focus was centered on the main causes for clients to lose money. According to the regulator, it estimates that clients will be losing much less money when compared to before.
According to Friday’s announcement UK consumers are set to lose between £267.4 million and £450.7 million less per year. But how did the FCA reach this conclusion?
Hard Data Reinforces Direction
The sharp transformation necessary for the industry to adopt the changes has been welcomed by the regulators. As Finance Magnates a couple of weeks ago, the FCA mandated regulated firms to provide it with a massive set of data.
In the beginning of November, the UK regulator asked firms to send it data related to a number of areas. Data which only brokers have. The 46 basic questions have been divided into segments: retail vs professional; before August 2018 vs after August 2018.
The FCA gathered data on total deposits, client funds volumes, the number of trades, exposure, profitability and much more.
At the time we stated that sources across the industry were viewing the effort as a means for the FCA to assess the effectiveness of its measures. Some even went as far as speculating that a change to the “temporary” nature of ESMA’s measures .
Fast forward a month, and the change is a fact. An overwhelming majority of market participants has been expecting this. but firms which have been holding out in the hopes that the market can turn have been desperately optimistic about the “temporary” designation of the ESMA’s measures this summer.
Last Friday, the FCA’s announcement has dispelled that prospect. As to the ongoing dispute how much more trouble lies ahead for the industry, we are about to find out.
Second Phase of Consolidation
After speaking with some senior executives at the Finance Magnates London Summit, I have come to the conclusion that there is a gap in the market. The gap has been between sellers of brokerage companies and buyers of brokerage companies.
There have been a number of firms in the industry that are looking for acquisitions for years. That said, they have voiced an overwhelming consensus: the asking prices are too high.
The mismatch between buyers and sellers has been ongoing for a while. Were the holdouts banking on the new EU regulation being “temporary”?
The number of licensed companies in the EU and in the UK is staggering, that’s for sure. If we are to take cues from bigger companies, the conditions for survival have also evolved.
Having a subsidiary which is located outside of Europe is now essential for survival. The massive increase in demand for offshore services on part of clients, not only led to the rise of .
EU-regulated firms moved en masse to open offshore subsidiaries. While facing some , many have managed to smoothen out their trading volumes.
For those that were swift in creating an adequate offshore entity, the initial shock in August has already been forgotten. It was last month when I started hearing that some brokers managed to get back to pre-ESMA trading volumes.
Criticism of Offshore Business
With all of what I described in the previous paragraph widely known, EU regulation has put brokers in a tough spot. On the one hand, they have data to show that they managed to move closer to their goal to have retail clients better protected from risk.
On the other hand, if clients are keenly expressing their desire to take on more risk, can EU regulation do more? For the time being, we don’t know. Some voices across the industry shared in private conversations that they don’t see this (offshore) lasting long.
Others are confident that it doesn’t matter how long it lasts, they just take the opportunity. One jurisdiction which is a safe haven for the industry, Australia, is traditionally playing a regulatory catch-up with the rest of the world in about two years time.
Apparently, that is enough time for the now lucrative license in Australia to .
Offshore subsidiaries are much cheaper, but they come with other headaches, such as expensive payment processing, difficulties with bank accounts, etc.
Be that as it may, I don’t see offshore subsidiaries of EU-regulated brokers closing any time soon. After all, EU regulation focuses on protecting the consumer (or so do regulators claim), so if that same for more risk, there is not much else that the ESMA can do. Nor should it.