Regulatory changes hit CMC Markets profits in H1

CMC Markets has blamed regulatory changes across Europe, low market volatility and range-bound markets for a decline in revenue and profit during the first half of its financial year.

Total revenue amounted to £84.2m (€95m/$108.4m) in the six months ended September 30, down from £102.4m in the same period last year.

This decline was followed by an increase in operating expenses, which rose 6% year-on-year to £62.7m. CMC said this was due in part to efforts to expand the capacity of its stockbroking business through its white label partnership with the Australia and New Zealand (ANZ) Banking Group.

This was partially offset by capitalisation related to the ANZ project, as well as lower discretionary performance incentives. The company warned it is likely operating costs will increase again in the second half due to higher operating expenses within the stockbroking business, but this will be partially offset by lower costs in the CFD business.

CEO Peter Cruddas said: “Whilst trading in the first quarter outperformed the same period last year, as previously announced, the second quarter was particularly difficult.

“Volatility was low, and unusually the majority of asset classes traded in tight ranges. This was further compounded by the impact of European regulatory change that came into force on August 1. As a result, overall profit after tax was significantly lower than the same period last year.”

In June, the European Securities and Markets Authority (ESMA), the financial regulator for the European Union, adopted new measures for the provision of contracts for difference (CFDs) and binary options.

ESMA implemented the first set of rules in July, whereby companies now face a probation on the marketing, distribution or sale of binary options to retail investors.

In August, restrictions were introduced regarding the marketing, distribution or sale of CFDs to retail investors.

These include leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on accounts; preventing CFD providers from using incentives; and a risk warning delivered in a standardised way.

This contributed to a sharp decline in profit after tax, which fell from £29.8m in the first half of 2017 to £7.2m this year. Finance costs for the period increased from £467,000 to £693,000.

However, Cruddas says that there regulatory changes will ultimately benefit CMC's business in the medium- to long-term.

He said: “I continue to believe that in the medium-term CMC will benefit from the changes made by the European regulators, as clients move to quality well-regulated providers, and we are beginning to see evidence that average retail client tenure is extending following the implementation.”