As the ledger turns a new page in the Plus500 affair, normalcy returns

Chris Lee

All is quiet on the Plus500 front. An eerie silence has settled into local newsrooms, when it comes to recent reporting on the Plus500 affair. The last raft of news articles occurred nearly a week ago, back on the ninth of June, after Plus500 management provided an update on its efforts to free up accounts blocked by the Financial Conduct Authority (FCA). Dozens of pressrooms jumped on that release like a duck on a June bug, not wanting to miss an opportunity to gain new readership from the ongoing controversy.

The news was entirely positive, if you were willing to give Plus500 a little slack and accept the latest missive from the firm’s CEO, Gal Haber. In a manner befitting a senior executive about to receive a financial windfall from a corporate buyout, the ebullient Haber announced that, “We have made progress in re-approving customer accounts during the last week and as a result expect a majority of clients who have completed the remedial AML procedures to be unfrozen within the previously expressed timeline. This will be followed by contacting inactive customers.”

An update on the Plus500 progress was included in our last article on this fiasco, but for those that missed it, here is a brief summary:

  • Of the nearly 24,200 accounts that were frozen, documentation had been received for 10,147 of them, representing roughly a 42% re-submission rate;
  • Of this figure, some 8,457 accountholders have had their new docs approved, an 83% recapture rate;
  • Approximately 62% of these clients, 5,205 to be exact, have actually reactivated and are actively trading once more;
  • The attrition rate of accountholders approved, those clients electing to withdraw their funds and close their accounts, stands at 5.4% after 457 clients went elsewhere;
  • As of the Plus500 release on 9 June, there still were around 14,000 accounts without the proper credentials and documents. These accounts constitute a backlog of about 58% to be resolved;
  • The good news is that nearly 23,000, or 95%, of the owners of effected accounts have logged onto the website during the last month, suggesting that ongoing contact has been realized to a high degree, despite the crisis that has occurred.

What is the importance of this data?

To begin with, progress is being made, but there remain questions regarding exactly who is impacted and where the bottlenecks reside. As long as puzzle pieces appear missing, then questions will be asked. For example, Plus500 has stated in the past that they have 105,000 accounts. They have also stated that 50% of their accounts lacked the proper AML documentation, as prescribed by the FCA, and were thereby frozen. The 24,200 figure of frozen accounts, inferred from the above release, is only 23% of their account base, a far cry from the reported 50% number.

What could the possible reasons be for these math discrepancies? Marketing practices may be the culprit. Companies love to tout a high account figure to show success in the marketplace, but then how many of these were active? In its release, Haber claims that they will also be contacting inactive accounts, but no figure is given, nor is a definition provided that would explain the obvious gaps. Perhaps, there are accounts that are exempt from the scrutiny of the FCA, such as those in Australia and Cyprus, as a few analysts have surmised.

Was the FCA more lenient on UK accounts, when it applied its standard for identity requirements? Payments to UK residents would not necessarily mean that funds in the form of withdrawals or distributions would have to cross a national border. Much of the AML law on the books relates more to cross-border transfers than to domestic issues. Other laws and regulations in the banking sector traditionally cover these types of transfers, but there is no consistency on a global basis.

After the 911 terrorist crisis, many countries adopted legislation similar to the Patriot Act in the United States. This and other legislation re-defined the existing “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML) statutes at the time. The general presumption made by a regulatory authority, when it comes to cross-border compliance, is that the country on the other end of the transaction is forcefully applying its own set of KYC/AML regulations to the letter. In other words, the FCA can only review what it can see in the UK. What happens in Cyprus, Israel, or Australia is outside of its jurisdiction, unless the transaction in some way goes through the UK.

Plus500 management has also stated in previous annual reports that roughly 50% of its revenue is derived from UK residents. Spread-betting is legal in the UK. Plus500 is actually a small player on this stage, when compared to the likes of the IG Group (IG), one of its direct competitors. New conspiracy theories have appeared daily regarding how IG may be pulling the puppet strings in the background, slipping information to the FCA to provoke them into action and overtly wooing staff away from Plus500, as if a pirate raid were in full swing.

IG, at a $4.3 billion market cap, would appear like a Goliath, goading little David, in the form of Plus500, to fight. Military strategists will tell you that every war since the dawn of time has always been fought, at its core, for economic reasons. Profit margins in the gaming business can be outrageous, well over 50%, a good reason for a competitor to attack, especially if the small fry has been highly successful of late. Market analysts have been musing as to the point when IG management would strike back with a vengeance. As Playtech enters the scene, the fight takes on mythic proportions.

What is this fifth week going to bring in the way of new news?

As we noted at the outset, there is an eerie calm that has settled over this news story. The excitement of the past few weeks has begun to subside, in a similar fashion, as would a corrective wave following a strong trend. With an obvious story line lacking, the next wave of news will have to come from true investigative reporting. The folks at Leaprate went back in time to turn over a few rocks to see what would crawl out from under them, only to discover that this recent infraction with the FCA was not the first. It seems that a similar action took place last October, but without the recent fanfare.

The October ruling applied to a relatively small subset of accounts, nothing like the 24,147 figure frozen on the 18th of May. There is also one FCA restriction that has not received much attention, but it could be very limiting in its nature. The exact wording of this restriction is as follows:

“(ii) in relation to new clients, not take on any new clients after 12.00 am on Friday, 15 May 2015 unless and until it has implemented new AML procedures which enable Plus 500 to verify those customers’ due diligence information in accordance with procedures and the Money Laundering Regulations 2007;

(iii) in relation to new clients, not take on any new clients unless and until it has taken all necessary steps to ensure that its assessment of a client’s appropriateness complies with COBS, in particular COBS 10;

(iv) take all reasonable and necessary steps to ensure that all future financial promotions (including financial promotions made via Plus 500’s website) which are issued and capable of having effect in the UK (a) are balanced, fair, clear and not misleading; and (b) comply fully with the Conduct of Business Sourcebook (“COBS”).”

Traditional forex and Binary/CFD brokers will typically allow a new client to trade the moment funds are posted to an account, along with any bonuses that have been earned. The restriction above would seem to limit any activity until compliance with AML and COBS procedural rules were satisfied. This activity delay, so to speak, could drive clients away into the hands of foreign competitors that imposed no such delays in the first place. Attrition and restricted growth aspects going forward could weigh heavy on the value of Plus500 shares, as stock analysts estimate the impact on earnings.

These machinations may not mean much if the merger with Playtech proceeds as expected. Shareholders of Plus500 shares were informed at the end of last week that there would be a Special General Meeting of Plus500, to be held at 11 a.m. on 16 July 2015. The notice included the recommendation of the Plus500 Board, written in bold capital letters, as:


Unless contested, Israeli law would apply and require a 50.1% positive vote of the shareholders to approve the deal. Odey Asset Management, the largest individual owner of Plus500 shares at something above 25%, is expected to vote against the merger, based on its recent statement that read, “We believe 400p per Plus500 share in cash to be an opportunistic bid exploiting current regulatory issues and risks. In our view 400p materially undervalues Plus500 and we do not intend to vote in favour of the cash acquisition of Plus500 at this price.” Regulatory approvals must be obtained, as well.

Concluding Remarks

All is calm at the moment, as the Plus500 Fiasco moves into its resolution phase. Client accounts are becoming unfrozen at a quickened pace. Complaints on this website have declined significantly, as customers report positive progress. It even appears that the Customer Service reps at Plus500 have managed their backlog to a minimum to the point where they can also respond to customer issues on our site, as well as their own and others. The documentation effort still has a ways to go, but fears are being allayed and confidence is being restored daily. The end game is in sight.

The focus will now shift to the merger — first the Plus500 shareholder approval, and then regulatory approvals. Will a lawsuit clog up the works? Only time will tell on that front, and, for executives and directors of Plus500, who, according to one analyst,  stand to make a £160 million windfall if the merger stands, the waiting game may be tedious and soul wrenching. Injured shareholders and customers would only regard such a torturous waiting game as well deserved by a management crew that put them through the ringer with reckless abandon. Sic transit Gloria mundi – So passes the glory of the world.

Chris Lee

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