Plus500 Gets Battered and Bruised by FCA Over ID Compliance Issues

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$650 million in market capitalization is a big number, and it is even bigger when it appears on the loss side of the ledger. Plus500 shareholders have not jumped out of any windows, but the share price for this high-flying UK IPO took a nosedive over the past week when the Financial Conduct Authority (FCA) came down hard on the broker for ID documentation infractions. Senior management for the firm was embarrassed over the lack of follow through from lower staff members, but clients, who had their accounts frozen, soon became an angry lynch mob looking for blood.

Every broker must deal with the occasional complaint on the Internet from an irate trader, but Plus500 may have set a record this week for customer rebellions. Complaints are running into the thousands on many websites after trading accounts were frozen on the 18th of May. These freezes also came with prohibitions on any withdrawal requests until identity documentation issues could be resolved to the FCA’s satisfaction. Open positions could be closed, but that was about it.

When the news hit, the shares for this publicly traded company fell off a cliff. Ever since its highly favorable IPO in 2013, the share price for Plus500 took flight, finally leveling off at £7.75. The forex industry has recently been under attack by the press for price fixing scandals at major banks. It was time for the fickle finger of the press to choose its next target, and, unfortunately for Plus500, it became the next victim. Over the ensuing week, shares fell like a rock down to £2.48. Shareholders shuddered, as roughly $650 million in market value went up in smoke. A modest recovery took place, but stalled.

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Who is Plus500 and what is its major issue with the FCA?

According to the firm’s website, “Plus500 is a leading provider of Contracts for Difference (CFD’s), delivering trading facilities on shares, forex, commodities and indices, alongside innovative trading technology. The Plus500 trading platform is offered by Plus500UK Ltd., a UK based company with its main offices located in the city of London. The company is authorised and regulated by the Financial Conduct Authority (FCA) to offer Contracts For Difference (CFD). The company is a rapidly growing CFD provider in Europe and Asia and currently offers its portfolio of over 1000 instruments to over a million clients.” It was founded in 2008 and also has offices in Cyprus and in Israel.

Timing can mean everything, and Plus500 hit the market at the right time, pioneering the CFD market, where investors could literally speculate on the price direction for a given currency pair, stock, index, or commodity without ever having to take title to the underlying asset. Its business model enabled the digital option market to take off, as it signed both customers and affiliates to trade or re-sell its services to an avid customer base that soon preferred this simplistic option genre to traditional trading alternatives. Hyper growth soon set in, and, in 2013, Plus500 went public on the London Stock Exchange under the ticker ‘PLUS’.

Revenue growth was also swift, resulting in pre-tax profits of $138 million for calendar 2014 and surplus cash amounts substantial enough to pay healthy dividends to its happy throng of shareholders. These shareholders are no longer happy and were allowed to vent some rage at an Annual General Meeting (AGM) that occurred this week in the UK. The crisis centered upon the findings of a routine controls audit conducted by the FCA in January. The regulator determined that Plus500 staff had not secured the proper Anti-Money Laundering (AML) identity documentation for each customer account on file and specified a 15 May deadline for correcting the issue. The penalty for non-compliance would be a freeze placed on all accounts designated by the FCA to be irregular.

The FCA and other regulatory bodies have been on the hot seat after nearly $10 billion in fines and penalties were handed out to Citicorp, Barclays, UBS, JPMorgan Chase, and the Royal Bank of Scotland for manipulating rates in the foreign exchange market for five years. When regulators are embarrassed in the press and lose the confidence of the public, you do not want to be caught in their crosshairs, so to speak. Management at Plus500 had to know what was coming for their infractions, but they chose to think that they could negotiate their way to a reasonable compromise. The FCA did not blink.

AML statutes, adopted on a near global basis, require anyone, who deals in cross-border financial services, must know their customers according to specific rules. These rules stipulate the securing of three separate proofs of identity for each customer and the continual updating of this documentation on a timely basis. Many forex and digital option/CFD brokers, as a rule, attempt to minimize this recordkeeping headache by putting the burden back on the customer as a necessity when a withdrawal request is made – no docs, no withdrawal. The FCA appears to have taken a hard line on this requirement, but we are not privy to how sloppy a situation may have existed at Plus500.

What has happened recently to defuse this debacle?

Damage control is never easy for a corporation, but publicly traded companies are generally held to a higher standard of transparency when it comes to explaining away a crisis. As is usually the case, management tries a few different approaches, until they get it right. Fortunately for the firm, recent financial disclosures and audit results confirm that Plus500 is not in financial straights. There are no capital adequacy issues or cash that has gone unaccounted for, as long as we can trust Price Waterhouse Coopers, which happens to be one of the best and most trusted of all global audit firms.

Management had only to bite the cost bullet, devote additional resources immediately to the documentation task, and then produce ongoing results in the form of re-activated accounts. Chief executive Gal Haber has assured their traders that, “The current situation is regrettable, and we apologise to customers whose accounts are frozen; we intend to resolve these issues within as short a time as possible. We will update customers and shareholders with the progress being made over the coming days and weeks.” He went on to note that 40 staff members were hard at work to rectify matters.

Are traders in a state of mind to be patient? Judging from the plethora of negative comments on forex blogs, one would have to assume that patience is nowhere to be found. The account freeze, however, is slowly thawing. A number of favorable comments are beginning to appear that claim that account access is open once again and that withdrawal requests are being approved and processed. These customers may have been the first ones to complete the required questionnaire and a current set of identity documents that satisfied FCA officials on site.

What are the future prospects for Plus500?

Management has stated that it will take another month to clean up the documentation mess. As for which customers will stay or leave or how their actions might impact future revenue is still in doubt. The firm did announce that revenues to date for 2015 are more than the entire total for 2014, but analysts will be closely watching data releases for this quarter to make their adjusted forecasts. If all goes well, then the stock price should appreciate, as long as there are no new crises that arise from the shadows.

Analysts at Liberum Capital have been touting the stock as an excellent reversal opportunity, but even they have concerns going forward. Cormac Leech, an analyst with Liberum, commented that, “Today’s statement does not provide any information on the number of accounts which were frozen or the number which have been unfrozen during the remediation plan. There is also no information on the behaviour of customers after their accounts have been unfrozen. We believe this information will be key to developing meaningful financial forecasts for the group.”

As long as there is uncertainty, there will be volatility, when it comes to the Plus500 share value down the road. As for traders, it has more to do with human nature and how one reacts when treated poorly. There will always be a subset of accounts that will move immediately, the disgruntled and angriest of the group. Most people, however, resist making changes until forced. Staying is just too convenient, and, if the management has any foresight left, they should develop a healthy bonus program for all that stay, without any prohibitive “strings” that would only infuriate an already agitated fan base.

Concluding Remarks

At the Plus500 AGM, Chairman Alastair Gordon also announced that approved pay raises would be waived until resolution of the current crisis met with his satisfaction. He went on to say that the firm “has taken a number of lessons away from this current situation and is determined to restore Plus500’s business to full health. We assure customers and shareholders that Plus500 has a sustainable business model and is managed and governed by a board which is committed to transparency and robust compliance.”

Traders may have tired of words from the management of Plus500. Reactivating accounts are the only actions that will regain trust from this alienated group. On the positive side, progress is being made on that front. The company also appears to be on sound financial footing, according to recently audited financial statements. Odey Asset Management, a local hedge fund, increased its ownership position to 19% and remains the largest shareholder of the firm, another positive development as for the future prospects of the company.

The message is clear. Never wave a red flag in front of a raging regulatory bull, especially one that has been recently wounded in the press. The FCA could have been more lenient in meting out its cruel form of justice, but it chose not to go that route. As a result, stockholders lost a mountain of money. Customers are betwixt and between, and the forex industry took another blow to the gut. One can only guess at how many other brokers out there are furiously checking to see if they are in compliance. If they are, you can be sure to see a press release about it. If you do not receive one, then request a notification that compliance is not an issue and will never be one.

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