How Brexit will affect the CFD and spread betting industry

With Brexit now much more certain than it was even a few months ago, business leaders are much more willing to speak about how it will affect them.

Andrew Edwards has been CEO of Saxo Capital Markets, one of the best-known multi-asset investment and trading providers, including contracts for difference (CFDs), since November. Before that, he worked for City Index and ETX Capital. Here’s his take on how Brexit is affecting both Saxo Bank and other providers of CFDs

For the first 18 months since the vote, most firms decided “to postpone decisions, or do the bare minimum of planning to satisfy their shareholders”, says Edwards. But in the past few months, there has been a “decisive change”, with companies across the board “starting to flesh out their plans”.

Most firms are “looking in depth at the impact and the risks”. In the financial sector there is now a widespread recognition that, thanks to EU membership, institutions have enjoyed “largely frictionless movement of talent and services” and that, post-Brexit, they “are not going to have the same level of freedom”.

The loss of financial passporting is a blow, but isn’t all bad

For example, as a subsidiary of a large Danish company, Saxo regularly transfers staff between its offices in London and Copenhagen and vice versa. The two offices also carry out certain functions for each other. When Brexit does take place, such staff transfers will become much more complicated, as there are likely to be substantive restrictions on free movement.

With the loss of financial passporting, some types of financial transactions between the two offices may become impossible, while others may have to be carried out on a paid-for basis (increasing the amount of paperwork and bureaucracy).

Still, Edwards admits that “the loss of financial passporting isn’t all bad”. This is for two major reasons. Firstly, Saxo already has separate entities for each country, so it will still be able to serve customers across Europe.

More importantly, at the moment, the major spread betting operators, and firms like Saxo that offer CFDs and leveraged forex, face significant competition from fly-by-night firms in certain ‘light-touch’ European jurisdictions. These firms have “contaminated the industry” by engaging in shady practices. At the moment the FCA can do little about them because they are allowed to passport into the UK. However, after Brexit the FCA will have much more ability to either block them from the UK market, or force them to behave in a more ethical and transparent way.

The UK leads the way in regulation – and will continue to do so

Whatever happens, Edwards doesn’t see the UK adopting a low-regulation model. Indeed, the FCA has a reputation of being the “gold standard for regulation”, with the rest of Europe following its lead – the ESMA (European Securities and Market Association) proposals on leverage and promotions are likely to follow the FCA’s original ideas, which it outlined in 2016. Even after Brexit the two bodies are likely to still work closely together, even if the FCA is no longer formally bound by the ESMA’s decisions. The bottom line is that there “isn’t going to be a lighter touch”.

While many in the industry think that the proposed restrictions on leverage go too far, Edwards disagrees. He notes that, “Saxo has never been aggressive on leverage” and “has never offered incentives to customers to start an account”. Additionally, relatively few Saxo clients have negative balances – something else that Edwards thinks has given the industry a bad name.

Although the reforms are still “the biggest change for two decades”, they will reward established companies that have an operated “a customer friendly business model” at the expense of those who have solely focused on providing the highest levels of leverage. Overall, we will see “fewer, better behaved companies”.

It won’t be painless, but it’s not the end of the world

While some business leaders have complained that the uncertainty around Brexit has prompted some staff to return to continental Europe, Edwards hasn’t seen any evidence of this – at least not so far. However, he feels that the “number of Europeans at all levels who are applying for jobs with us has fallen noticeably”. University graduates, especially from Eastern Europe, “are definitely thinking twice about coming to London”, though part of this is due to strong wage growth in Poland and elsewhere that has narrowed the gap between the two countries.

Edwards is mildly optimistic about what the post-Brexit UK-EU relationship will end up looking like. He thinks that “once these early stages have been completed the main players will be able to put their egos aside”, especially since many of the talks will take place between industry experts “who will have their commercial hats on”. Given that the UK is Europe’s major trading partner, he thinks that it should be able to get a better trading deal than Canada, in a much shorter period than the seven years that it took Ottawa and Brussels.

Of course, it’s not all going to be painless, and UK firms will have to accept that they will lose a lot of access to the EU after Brexit. After all, “Europe can’t be seen to be giving a non-member a better deal that existing members”, points out Edwards. Still, “one thing that I’ve learned from being a businessman is that big deals can be negotiated surprisingly quickly if both sides are willing to work hard”.