IG Group hit by new ESMA controls as revenue slips in FY2019

Spread betting and contracts for difference (CFD) provider IG Group Holdings has cited the impact of new European Securities and Markets Authority (ESMA) regulations as the primary reason behind a 16% year-on-year drop in revenue in its 2019 financial year.

Revenue during the 12 months through to May 31, 2019 amounted to £479.6m (€553.4m/$596.6m), down from £569m in the same period in the previous year. IG Group in May warned investors of the expected revenue decline as a result of the new ESMA measures, which came into effect in Q1 of FY19.

IG Group noted that revenue generated from clients in the ESMA region was 26% lower than in 2018. The UK remains IG Group’s core market, but revenue for the year was down 23% to £200m, while European Union revenue also slipped 42% to £68.2m.

ESMA banned the sale of binary options to retail clients in July 2018, and followed this with new restrictions on the sale of CFDs from August that year. Both measures became effective during the first quarter of 2019, and though ESMA lacks the power to implement permanent bans on either product, 24 regulators in EU countries have banned binary options sales permanently, while 17 have introduced restrictions on CFDs.

Other jurisdictions are likely to follow suit, with the Australian Securities and Investment Commission expected to open a consultation on new controls for CFDs. The Chinese State Administration of Foreign Exchange has also asked ASIC to prevent Chinese nationals trading CFDs through platforms under its jurisdiction. Furthermore, new restrictions on foreign exchange trading for retail clients in Singapore will be tightened from October this year.

IG Group said it was supportive of these new controls, noting that it adheres to the highest regulatory standards.

“Leveraged derivative instruments are not appropriate for everyone, and through its focus on ensuring that its marketing and advertising targets an appropriate audience, IG seeks to only accept clients who understand our products and the risks involved,” it explained. 

“The company's long held view is that robust supervision around who the product is marketed to, and which applicants are accepted as clients, remains the most significant measure to drive improved client outcomes.”

There was growth elsewhere for the provider, with its businesses across the rest of the world seeing a 2% increase in collective revenue. For the Europe, Middle East and Africa region excluding the EU, revenue climbed 19% to £43.7m.

IG Group also saw year-on-year revenue growth in all other markets around the world, including Australia, Singapore, Japan, the US and emerging markets.

Over-the-counter leveraged products remain the main source of income for IG Group after generating £454.2m in revenue in FY19, although this is 17% less than in the previous year. There was a 1% rise in exchange traded derivatives revenue to £16.8%, while stock trading and investments hiked 48% to £5.9m.

IG Group was able to make slight savings in terms of spending for the year, with total operating costs down 2% from £290.1m in FY18 to £284.3m. Operating expenses actually increased from £254.2m to £259.6m, but the provider cut variable remuneration from £35.9m to £25.7m.

However, the year-on-year decline in revenue meant operating profit fell 31% year-on-year from £281.1m in FY18 to £192.9m in the most recent 12-month period.

Profit before tax slipped 31% from £280.8m to £194.3m, although IG Group paid less tax in FY19 – £36.0m down from £54.4m. After taking this into consideration, profit for the year was down 30% from £226.4m to £158.3m.

Reflecting on the results, chief executive June Felix repeated the message that IG Group gave when publishing the initial forecast in May. The provider expects to return to revenue growth in FY20, with this to be to be delivered in the second half of the year, as Q1 FY19 was only partly impacted by new ESMA measures.

“The company has made good strategic and operational progress during FY19, taking action to ensure that the business successfully navigated the impact of regulatory change,” Felix said.

“We have developed our strategy to position the business so that it will continue to deliver for our clients, our shareholders and our other stakeholders under a more restrictive regulatory environment in the UK and EU. 

“The company adheres to the highest regulatory standards, differentiates itself within the industry through its good conduct, and I believe that the business is well positioned to continue to adapt to regulatory change and to thrive in an evolving market.”

Felix added: “I am excited by the opportunities we have identified, and I am confident that the company will return to revenue growth in FY20.”