Financial Services

Shares in spreadbetters plummet on new rules

UK’s financial watchdog tightens rules for spread betting products following concerns

The UK’s Financial Conduct Authority is putting forward plans to clamp down on firms selling “contract for difference” (CFD) products to retail customers. Photograph: John Stillwell/PA Wire

Tue Dec 6 2016 - 09:06

Britain’s financial watchdog proposed tougher rules for retail financial spread betting products known as “contracts for difference” (CFD) after finding that 82 per cent of customers using them lost money.

"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," the UK's Financial Conduct Authority (FCA) said on Tuesday.

A similar review by the Irish Central Bank in 2015 found that 75 per cent of CFD clients lost money.

CFDs, including spread bets and rolling spot foreign exchange products, are agreements between two parties to exchange the difference between the opening price and closing price of a contract. Seán Quinn famously used CFDs to build up his stake in Anglo Irish Bank.

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Penal rules

Shares in UK’s IG Group, which holds 40 per cent of the UK financial spread betting market by number of active primary accounts, fell 22 per cent to 611 pence in early trade. Shares in retail brokerage CMC Markets were down 29.9 per cent at 128.17 pence. Both IG Group and CMC Markets did not immediately comment when contacted by Reuters.

“FCA seems to be imposing more penal rules than the Cypriot regulator last week . . . This will result in a much smaller less profitable CFD and spread-betting industry,” Liberum analysts wrote in a note.

The FCA said on Tuesday it would introduce stricter rules for CFDs to ensure the sector addresses the shortcomings identified, ensuring that retail clients are aware of the high risks involved in trading these “complex products”.

Proposed measures

Some of the proposed measures include standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts to highlight the risks and historical performance of these products and setting lower leverage limits for inexperienced retail clients.

Companies would also have to leverage at a maximum level of 50:1 for all retail clients and regulate leverage caps according to their risks. Firms would not be allowed to give form of trading or account opening bonuses or benefits to promote CFD products, the FCA said.

– (Reuters)

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