UK Spread Betting Companies Rush to Get Lucrative Deals
There is a significant degree of scepticism about contracts for difference (CFDs) in the United Kingdom. Recently, a noted Irish bank was forced to file for bankruptcy, and an insider-trading scheme to the tune of $100 million was uncovered in the US. Various other anomalies in this market have made their rounds, and this has resulted in regulators across the United Kingdom and continental Europe tightening the screws on the industry.
One of the most prolific and widespread advertising means for CFD providers in the United Kingdom is sports teams, notably Premier League football teams and UEFA teams too. These include clubs like Liverpool Football Club, Arsenal FC, West Ham United, Southampton, Real Madrid, and the like. This is one of the ways that Spreadbetting companies – good and bad can attract a large and devoted client base. Various regulators are now considering strictly policing marketing channels by banning advertising via sports.
CFD Trading Regulations
CFDs are derivative trading instruments whereby UK traders can place a trade on an underlying asset. With CFD trading, no ownership of the underlying asset takes place – the trade is simply a forecast on whether the price will rise or fall at expiry. It is a speculative option which is increasingly popular with things like cryptocurrency (BTC, BCC, ETH etc.). These derivative trading instruments are available to retail investors throughout the United Kingdom, including amateur traders. The FCA (Financial Conduct Authority) has taken it upon itself to police this industry more closely to protect relative novices from unwittingly losing their money to CFD brokerages.
In the UK and Europe, they are hundreds of thousands of CFD traders. In Australia, they are no longer considered OTC (over-the-counter), they are also on the ASE (Australian Securities Exchange). Of all the markets in the world, none is as big and prosperous as the UK’s CFD trading market. To date, CFD brokerages in the United Kingdom are set to be holding approximately £3.5 billion worth of funds.
Is the FCA Seeking to Curtail CFD Trading Activity?
Make no mistake – CFDs are not a new phenomenon. The issue is not whether they are a viable trading option, it’s more about their accessibility to relative novices in the markets. Greenhorns have little or no financial knowledge, and when they risk too much of their capital on CFDs that can go either way, this presents a problem. One of the big issues with CFD trading is leverage. This has the potential to increase profits, but it can also significantly amplify losses. For example, a £500 trade can be leveraged for an amount of £250,000.
What happens with CFD trades is that market mechanics can swing the needle either way. It is estimated that 8/10 traders lose money on CFDs, particularly if they are novice traders. Most CFD brokers have complied with the FCA requirements and now readily advertise the risks associated with trading derivatives instruments. These are risky trades and investments, but they also form part of a new-age financial portfolio which is a diversion from traditional stocks, bonds, Forex and indices.
Reduced Promotion via Marketing Channels
The FCA wants to guard against excessive promotion of CFD trading via sports. They also want to caution and educate the public about the risks of trading financial instruments with little or no financial knowledge. Since these are leveraged options, less money is required up front, but losses can be amplified beyond what you have available in your account. The FCA has clamped down tightly on the CFD trading industry across the board – good and bad. Bonuses have already been scrapped, and leverage has been curtailed sharply.
Now, there are moves afoot for Forex brokers and CFD trading enterprises to lock in endorsements from the biggest sports teams and sports stars in the UK and Europe. Regulators are now tightening the screws on marketing initiatives. A noted UK broker – XM – recently signed Olympic athlete and superstar Usain Bolt, while Christiana Rinaldo is now the face of Exness trading. It is estimated that some $350 million was ploughed into sports sponsorships for online trading enterprises between 2010 and 2016. According to the FCA, some £2,200 per trader is lost to CFD providers in the UK every year.
In January 2018, the FCA will have sweeping authority to clamp down on CFD trading, if it deems it necessary. Leverage levels are going to be reduced and marketing activity will be limited. Now, sports teams and other companies are only going to be dealing with brokerages that meet national regulatory requirements.
What is your opinion of CFD brokers using sports teams and sports stars for marketing? Would you trust your team sponsor to offer you CFD trading?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.