By Noor Zainab Hussain and Huw Jones
LONDON (Reuters) - Shares in leading British spread-betting firms sank on Monday after the European Union's securities watchdog said it may curb core parts of their market under sweeping new product powers from January.
The European Securities and Markets Authority (ESMA) said late on Friday it was considering prohibiting the marketing, distribution or sale of binary options to retail clients, and restrict the marketing, distribution or sale to retail clients of contracts for differences, or CFDs, including rolling spot forex.
It will consult in January on whether to push ahead with such measures.
Shares in IG Group (L:IGG), CMC Markets (L:CMCX) and Plus 500 (L:PLUSP) were down between 8 and 13 percent by 1221 GMT.
Binary options and CFDs are financial products that give an investor exposure to price movements in securities without actually owning the underlying assets such as a currency, commodity or stock.
The ESMA has said it has been concerned about how these inherently high-risk speculative products are offered to retail investors, potentially leading to significant losses.
Britain's markets watchdog said last week it had noticed steady growth in the volume of CFDs linked to digital currencies.
The Financial Conduct Authority said it supported ESMA in its consideration of potential EU-wide product intervention.
Moves to restrict binary options and CFD markets would represent ESMA's first use of new product intervention powers that come into force on Jan. 3 under new EU rules known as MiFID II.
The rules give ESMA powers to go above the heads of national watchdogs to ban or restrict products, marking a major shift in EU-level financial powers.
Shares in spread betters took a beating last year when Britain's financial watchdog joined other European regulators in a crackdown on financial spread betting, a fast-growing 3.5 billion pound industry where most retail investors lose money.
"We expect the FCA to announce the finalisation of its permanent measures in the first quarter of 2018, and for those measures to be similar to ESMA's in an effort to harmonise regulation across the FCA and ESMA," Investec Research said in a note to clients.
GOING TOO FAR
IG Group said in a statement it had stopped offering its Sprint binary product to new retail clients in January, with revenue from binaries traded by clients in the UK and EU accounting for less than 5 percent of its revenue in the first half.
IG Chief Executive Peter Hetherington told investors on a call that ESMA's proposed leverage rules - restrictions on how much customers can borrow to make bets - "goes too far".
"What happens if you've got people who just want more leverage and choose to end up dealing with an offshore broker who is unlicensed in the EU, but then offer them more leverage that we are able to," Hetherington said.
He said the proposals would lead to consolidation of the industry over the short to medium term and there will be some clients "who will be looking for a new home".
CMC Markets said it could quickly respond to regulatory change as it did in Germany and Britain.
"We remain convinced that CMC is well placed to prosper over the longer term given the strengths of the platform," broker Peel Hunt said.
Binary products generated 2.1 million pounds ($2.80 million)of revenue from the UK and Europe in the first-half, CMC said, adding any prohibition on the marketing of binary options to retail clients will be "immaterial".
Plus500 said it has never offered binary options, adding that it provides protection to its customers across all its products.