CFD platform provider Capital.com advises on what investors should look for in an investment tool

While increased regulations are providing better protection for retail traders, it is likely that many brokers will cease to exist in a few months' time as a result, meaning consumers also need to understand what they want from a trading platform and what they should look out for in order to reduce their risk. SRP spoke to Ivan Gowan (pictured), chief executive at Capital.com, about the challenges ahead for platforms offering contracts for difference (CFDs) and binary options, following the introduction of product intervention restrictions announced by the European Securities and Markets Authority (Esma), in June.

"2018 has become the year of the regulation," said Gowan, adding that while this means there has been a lot for organisations to take on board in the past six months - and CFD trading platforms in particular - "all of these changes are welcome as they enforce a fairer and more ethical environment for retail investors".

Generally, over the last 18 months or so several National Competent Authorities (NCAs) have done consultations on the subject and Esma has tried to unify the broader view that the different regulators have been pushing for, according to Gowan.

"We have made a number of changes to our platform to make sure we're fully in line with the new requirements and to protect our clients by adding stop out levels if the margin hits 50% or excluding any cash incentives/bonus offers," said Gowan, pointing that the recent move by the UK Financial Conduct Authority (FCA) to tighten its rules will force out of business a large number of brokers that hold a 125k licence. "There are 23 125k licenced CFD firms in the UK alone," said Gowan. "Poorly capitalised firms that cannot provide the appropriate negative-balance protection for clients will not survive."

Firms holding a 125k licence cannot deal financial instruments on own account; but can hold clients' money or securities in relation to investment services it provides; it is not a collective portfolio management investment firm; and it does not operate a multilateral trading facility (MTF) or an organised trading facility.

Whilst this will create some short-term challenges for many traders, it's a "very positive move" from a consumer protection angle, according to Gowan. "It's important that those choosing to trade understand these regulatory changes and how they will impact the platform they use and that they choose the right provider for them to minimise their risk," he said.

Gowan also noted that there are two main themes in play around trading platforms used by self-directed retail investors. One of the challenges is identifying the cause of the problem which in this field is about a small number of firms not operating in the right way," said Gowan, adding that most complaints from investors/clients are around specific platforms not about the product itself. "But regulators have taken exception with the products themselves [although] the experience with the more reputable players is that they don't end up involved in many disputes that get escalated to courts or trade bodies."

Capital.com offers CFD trading on equities, commodities, indices, forex and cryptocurrencies which technically could be defined as structured products, according to Gowan. "As long as investors are aware of the risks, it is very easy to understand and explain how a 10 to 1 leverage on an equity asset works," Gowan said. "We are very transparent about fees and charges so the only issue here is clients understanding the level of risk they are comfortable with."

The firm has developed a dedicate app called 'Investmate' which has been set out to help investors gain experience through modules and courses designed to put the tools in the hands of investors so they can learn broadly the basics of the market and then move to more detailed areas of trading, analysis, risk management, etc., according to Gowan.

Esma's new measures are due to come into effect in 1 August 2018, at which point this business will likely change beyond recognition, according to Gowan.

"It's going to be harder to mess around with retail investors - a familiar theme and kind of obvious, but another good step on the way to doing it right and a positive boon for all those who still believe that you can sell a derivatives-based investment to a retail investor and still sleep at night," said Gowan. "We have a very strong focus on digital engagement and onboarding, and less focus on sales. We want to create standards for this market and are also investing in educating our clients."

The firm is also putting significant emphasis on artificial intelligence (AI) and machine learning to provide bias detection platforms which looks at the ways people are trading and works to detect clients' trading biases and recommends personalised content to help them trade smarter.

Before selecting a retail trading and investment platform, consumers should ensure the platform offers full and immediate compliance with the upcoming Esma regulatory changes (negative balance protection - essential in preventing traders losing more money than they invested), according to Gowan.

Other elements of a fully compliant platform include an individual trade closeout rule - so that traders will always know the maximum loss potential; a fault maximum leverage limits that reflect the volatility of each asset class; as well as a hedged business model that aligns the interests of the provider with the interests of the trader - not simply taking the other side of the trade; and quality education both on the workings of the financial markets, and on how to improve trading performance and learn from past mistakes.

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