Crackdown on financial spread betting proposed by FCA

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Trader watching monitorImage source, AFP

New rules to help protect investors using financial spread betting - in which 82% have lost money - have been proposed by the financial watchdog.

The Financial Conduct Authority wants to tackle the "contract for difference" (CFD) market, which includes financial spread betting.

It fears that retail customers are using products they do not understand.

The CFD market offers the opportunity to speculate on a shift in the market without owning the underlying asset.

The FCA is proposing measures to limit the risks of CFD products and ensure that customers are better informed.

"We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses," said Christopher Woolard, the FCA's executive director of strategy and competition.


Image source, AFP/Getty Images
Image caption,
Plus 500 are one of Atletico Madrid's sponsors

Simon Gompertz, BBC personal finance correspondent

Some 125,000 small investors are active in betting on movements in shares and currencies rather than buying the underlying investment.

Spread betting firms are relentless in recruiting them, by blazoning their brands on football shirts, on public transport and in free newspapers.

The internet has made dealing and advertising much easier. The companies pay to feature prominently on internet search engines and advertise on social media.

A handful of players dominate in the UK, but 96 are authorised and another 130 promote their online trading from elsewhere in Europe, mostly from Cyprus.

Losses can be instantaneous, with little chance of recovery, because they allow people to take big risks with small stakes.

It means that a small movement in the price of shares can result in the security deposit an investor has put up - the margin - being wiped out.

These complex investments are often sold to ordinary investors online. The potential losses or gains can be much larger than from traditional trading as an investor can hold a trading position representing a much higher value than the size of the stake invested.

The FCA's analysis found that 82% of clients lost money on such products. The average among clients checked by the watchdog was a loss of £2,200 a year.

Its plans include:

  • Standardised risk warnings given to customers
  • Proportion of winners and losers on products published by providers
  • Capping the proportion of "borrowed" funds that can be used for trading by inexperienced retail clients
  • Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products

Consultation on the plans is open until March, with a further statement expected from the FCA in the spring.

Immediate impact

Shares in firms offering these services were hit hard following the announcement.

CMC Markets and IG Group were the biggest fallers on the FTSE 250, both down about 30% in morning trading.

Plus 500, which also saw its share price fall, said the FCA's plans would have "a material, operational and financial impact on the UK regulated subsidiary". This represents about 20% of its global business.

IG Group said that it recognised there were "shortcomings in the approach to the marketing of CFDs" by certain firms, often operating from outside the UK.

"Certain of the FCA proposals could enhance client outcomes," it added. "However, the FCA's proposals do not appear to directly apply to firms operating from outside the UK offering CFDs and binaries to clients in the UK on a cross-border services passport from another EU member state.

"IG will carefully consider the implications of the FCA consultation paper."

CMC said it had consistently focused on higher-value experienced premium clients who understood the markets and products they were trading.