What did the GameStop saga expose about UK trading regulation?
The US trading sector is still feeling the consequences of January’s GameStop trading saga.
At least two more hearings are set to take place. And a handful of lawsuits have been levied against both Robinhood and Gill.
Impact on UK player Freetrade
Whilst it’s easy to focus on the US, it wasn’t just US stock trading apps which suffered reputational damage at the hands of GameStop.
German trading platform TradeRepublic, as well as UK stock trading app Freetrade, were among those to also temporarily curb the ability to buy or sell US “meme stocks” – which included GameStop.
Freetrade blamed its banking, foreign exchange (FX), and execution partners for the restrictions. The “culprits”, as the start-up’s customers referred to them on Freetrade’s blog, included Barclays, fellow UK fintech Currencycloud, and US capital markets firm DTCC.
Its chief marketing officer, Viktor Nebehaj, says Barclays “severely limited ” the rate of FX conversion trades for US stocks that it supported, resulting in “an 18x reduction in the volume of US trades” the fintech could accept.
Whilst the trading frenzy riled retail investors globally, further dividing Wall Street and “the little man”, it also exposed stances held be regulators. Particularly that of the UK’s Financial Conduct Authority (FCA).
FinTech Futures asked Sebastien Ferriere, a former FCA markets investigator currently training as a solicitor at Browne Jacobson, to unpack the FCA’s published response to trading restrictions on 29 January.
FCA backed companies over consumers
The short statement read: “Broking firms are not obliged to offer trading facilities to clients. They may withdraw their services, in line with customer terms and conditions if, for instance, they consider it necessary or prudent to do so.”
In supporting the explanation given by lots of brokers, that they “had to do it” because the clearing houses were no longer extending a guarantee of settlement, Ferriere says the FCA falls into a “grey area”.
This is because curbing trades undoubtedly “causes detriment to the investor”, which is one of the FCA’s three main aims – to protect the consumer.
By restricting the buying and selling of certain trades, platforms like Robinhood, TradeRepublic, and Freetrade incurred significant losses for a handful of consumers, as these traders were forced to hold onto positions which rapidly lost their value.
Ferriere explains: “From a regulatory perspective, the FCA seems to be saying here that it’s more about the terms and conditions and commercial arrangements between investor and the broker – or the investment platform – and less about a breach of some sort of obligation towards that investor.”
He adds that “at the end of the day”, the FCA is ruling on the side of the “commercial reality”. The regulator itself says: “broking firms are not obliged to offer trading facilities to clients”.
What could we expect from the FCA?
In July 2019, the FCA introduced permanent restrictions on the sale of certain types of contracts for differences (CFDs) to retail investors.
“A lot of these restrictions are related to making sure retail investors are not overly leveraged under those kinds of instruments. And they can’t lose their entire house by entering these kinds of trades,” says Ferriere.
“So that’s the kind of measure we can expect the regulator to start looking at,” he continues. “Although at this stage it is unclear.”
Under the CFD restrictions, retail investors can still access spread bets and CFDs. But they can only do so if they have in place affordability assessments and means-based testing carried out by the trading platform.
“If in making such orders,” says Ferriere, in reference to the highly volatile GameStop trades, “customers are told ‘you have to increase your margin’ or ‘you have to put more money in the game upfront’ – then they might respond better to that.”
“Rather than an outright trade suspension or halt,” he continues, “which ultimately stops them from having the agency in their own investment decisions”.
Politicians getting involved
In the US, it isn’t just regulators like the Securities and Exchange Commission (SEC) which are getting involved. US congressmen and women have also stepped in to shape the legal framework cocooning the likes of Robinhood.
Alexandria Ocasio-Cortez, a US representative for New York, said she supported the hearing into Robinhood’s decision to block individual investors from using the app.
The US politician has substantial sway on social media, with her Twitter account alone boasting 12.5 million followers.
The UK has seen political interest in other fintech sectors, such as the buy now, pay later (BNPL) space, in recent months.
In January, a group of more than 70 cross-party MPs – led by Labour’s Stella Creasy – tabled an amendment to the financial services bill to regulate BNPL firms like Klarna, Laybuy and Clearpay.
The group wanted to push through regulations within three months of the bill passing, but the UK government voted down the bill. Creasy called the BNPL space “the next Wonga waiting to happen”.
Whilst efforts by politicians were foiled, it shows a precedent of UK MPs getting involved in the regulation of certain fintech firms they believe pose a threat to consumers’ financial wellbeing.
The GameStop saga alone wasn’t enough to prompt regulatory action or significant political backlash in the UK. It did spur the European Securities and Markets Authority (ESMA) chair Steven Maijoor to announce an investigation into “the role of online brokers’ business models” on Tuesday.
It’s unlikely GameStop will be the first and only of its kind, as trading platforms, content creators and Wall Street continue to converge. There’s still time for the FCA to say more on the subject of GameStop, just as ESMA did earlier this week.