Spread betting firms count the cost of UK FCA clampdown

Business news sources have reported that around £1 billion has been wiped off the value of UK-listed spread betting operators, following the Financial Conduct Authority’s (FCA) industry clampdown on ‘contract for difference’ (CFDs).

Yesterday the regulatory body proposed a number of new measures aiming to protect inexperienced consumers and improve overall industry standards.

The measures include the introduction of risk warnings, setting lower leverage limits for new retail clients, capping leverage maximum levels and the outright ban of bonuses or incentives for CFD accounts.

The FCA stated that its measures had been implemented following research that found that 82% of clients lost money on CFD products.

The new measures include:

• Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of these products.
• Setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1.
• Capping leverage at a maximum level of 50:1 for all retail clients and introducing lower leverage caps across different assets according to their risks. Some levels of leverage currently offered to retail customers exceed 200:1.
• Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products.

“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,” detailed Christopher Woolard, Executive Director of FCA Strategy & Competition.

“We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products.”

The controversial CFDs are derivative products which allow investors to trade on price fluctuations without owning any underlying shares, which would be subject to stamp duty.

Through brokerages, traders can deposit money as collateral and open accounts trading significantly larger sums (sometimes 200X deposit amount).

The FCA’s clampdown sent shares in UK-listed spread betting operators tumbling, with IG Group the industry’s biggest trading platform recording a 32% decline (788-530p) wiping circa £900 million off its value.

Further declines saw CMC Markets drop by 30% to 125p representing a loss of around £160 million, and London AIM Plus500 record a decline of 28% to 388p losing approximately £150 million in value.

Yesterday’s decline would have a mild knock-on effect on leading industry technology provider Playtech, which saw its share price drop 2-3%, as the company has invested in financial trading products with a view of diversifying its product range.