Spread-betting firms saw more than £1bn wiped off their market value this week after the Financial Conduct Authority (FCA), the UK’s financial services regulator, announced new rules for the industry. Shares in IG, the UK’s biggest spread-betting firm, fell more than 38%, while CMC Markets fell by 35%, and Plus500 lost 30%.
Spread betting involves speculating on short-term market movements. Clients often employ “margin”, meaning that they only put down part of the value of their position, borrowing the rest from the spread-betting firm. The FCA says it has “serious concerns” that more and more people use margin with little understanding of the risks it carries. This could lead to “rapid, large and unexpected losses”.
The FCA’s sample of spread-betting customers found that 82% has lost money. That “might not be a problem if their products were being sold as a form of leisure”, like having a flutter on the horses, says Simon Goodley in The Guardian. But spread betting is “nowhere near as much fun” and vastly more complicated.
Hence the FCA wants firms to cap clients’ leverage (the amount of borrowed money they use) at a maximum of 50 times their capital, with lower limits for clients with less than 12 months’ experience. It will also ban introductory and other bonuses that encourage clients to trade, and force firms to disclose details of ratios of profits to losses among their clients