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Many eons ago, when I was but a young university student, there was a large field near to where I lived.
In the spring, the grass in the field would grow to the point that it was waist-height or even higher. This was a problem because there were snakes in the grass and children played in the field.
The people who lived nearby wanted to protect the children from the snakes. So naturally they did what any normal person would do in that situation – they tried to burn the whole field down.
The problem was that the field was also surrounded by houses, so the fire brigade came and put the fire out, to stop it spreading to them.
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“Do not burn the field,” they told the people who had set it on fire. “Otherwise we’ll have to come back again and put it out. Also your houses could burn down.”
“Ok, ok, no problem,” said one of them. Then the fire brigade left.
“Come tomorrow my friend,” said the one who had just said ‘no problem’ to the fireman. “We will burn again.”
He smiled, slapped me on the back, and walked off.
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I think of that guy quite a lot when I go to an iFX Expo or Forex Expo. But I also thought of him again last month because of a document that was published by the FCA.
This was a consultation paper about reworking how you can be classified as a professional client. This is relevant for CFD firms because a professional client can get access to high leverage.
Back when leverage restrictions first got introduced, there was a wave of firms trying to reclassify all their clients to get around the rules because of this.
“Ah, I see that you have a piggy bank and once spent over 30 minutes in your local branch of Halifax. That’s more than enough financial knowledge to make you a professional client” – that kind of thing.
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However, the rule changes the FCA is proposing are quite interesting because it’s a switch from being prescriptive to more open-ended. Currently you must have two of the following to become a pro…
- €500,000 in cash / investments
- 1 year of relevant experience in financial services
- 40 trades of significant size over the prior 12 months
The new proposals are that…
- You have £10m
Or (quoting verbatim)
- the firm has undertaken a qualitative assessment of the expertise, experience and knowledge of the client and is satisfied on reasonable grounds, that the client is capable of making their own investment decisions, and of understanding the risks in relation to the transactions the firm may undertake with the client and the products and services the firm may offer the client
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One point to note is that the regulator explicitly states that a track record of trading crypto, CFDs, or high risk assets alone would not usually be sufficient experience to become classified as a pro. The other thing the FCA looks likely to want firms to look at is the ability of a client to take a loss.
What this means is that this is not a case of a firm being able to invent whatever test they want and reclassify every client as a professional. Dream on brothers.
Nonetheless, if this does go through it would presumably open the door to more people being able to certify as professional clients. For example, at the end of 2024, almost 90% of Plus500 revenues came from users who had traded with the firm for over 12 months. Two-thirds of revenues were from traders who had been with the firm for over three years.
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If someone has been an active client for three years, it is hard to see how they could not meet that second option the FCA gives, although the lawsuit with IC Markets we looked at recently did reveal the interesting case of a man who traded CFDs for over a decade without understanding them.
But that takes us back to the case of the fire brigade and the burning field.
If you read the FCA document it kind of boils down to ‘make sure the person knows what they are doing and that they can manage any potential losses.’
Now imagine someone from the regulator saying that exact sentence to executives at a CFD broker. You just know what’s going to happen next.
“Ok, ok, no problem,” they’ll say. “We will not reclassify.”
The FCA person leaves the office.
“Right boys, pick up the phones,” the person in charge will say next. “We’ve got a lot of clients to reclassify!”
And well I’m kind of all for that – happy new year everyone!
