Risky spread betting practices are being targeted by the Financial Conduct Authority (FCA) in the United Kingdom. The crux of the matter is how to limit the vulnerability of traders at spread betting operators. Over the years many inexperienced traders have lost money on spread betting activity with Forex, commodities, indices and stocks. This prompted the FCA to impose stricter regulations on the industry. This is particularly notable of the retail spread betting industry. For the legitimate spread betting brokers, the issue is particularly significant. Further regulatory tightening measures are expected, amid a flurry of reports pouring in to the FCA. Many spread betting companies are concerned about their future prospects in an industry that is being hamstrung by regulation. In December 2016, spread betting companies found themselves on the ropes after the FCA proposals detailing a tightening of regulations in the industry. Almost overnight, billions were wiped off the FTSE 100 index and the FTSE 250 index, as investors pulled back from these companies. It should be remembered that regulatory tightening of spread betting activity is nothing new. European regulators undertook similar measures in 2016, but it was the UK’s FCA that imposed the harshest controls yet.
According to reports, the riskiest trading instruments are CFDs – contracts for difference. CFDs are derivative trading instruments where a trader can place a wager on a financial instrument. Anything goes, from Google stock to Tesla, to WTI crude oil, gold, copper and the like. However, the difference between CFD trades and traditional stock investments is that the trader does not actually take possession of the underlying instrument. In the UK, there is no stamp duty levied on CFD trades. These are some of the reasons that make it highly attractive to traders, given that the constraints of ownership and regulatory taxation are absent. It is possible to take up positions much greater than the nominal cash value in the account, thanks to leverage and margin. The FCA believes that leverage is precisely the problem. By multiplying profits or losses, traders can possibly be deeply indebted to the providers. The following graphic represents at the shock drop in the performance of spread betting companies on UK indices.
The FCA has been hard at work cracking down on multiple types of trading practices, including binary options trading, and contracts for difference. This follows a similar scrutiny across Europe. The issue it seems is that inexperienced traders are dabbling in the financial markets with high levels of leverage, and insufficient knowledge of the financial markets. While the upside risks are often promoted, the downside risks are ill-understood by many traders. For traders, the option to engage in spread betting activity remains. Now, the playing fields are being leveled with lower leverage available to traders. This is a double-edged sword, but invariably is a safer way to trade. Major spread betting companies across the UK are now limiting their product offerings to clients, and focusing instead on expanding the range of services and the platform features. New customers already being barred from trading in binary options, as a safeguard against further FCA regulations. Other FCA-compliant spread betting companies are launching limited-risk trading accounts. This typically entails innovative platforms and smart trading options.
Traders should avoid fly-by-night brokerages making promises of lofty profits and guaranteed returns. Spread betting with limited leverage, and in-depth platform offerings are certainly preferred. We will likely see a move towards professional trading activity at FCA-approved brokerages. The transition will take time, but the services will resemble the offerings of institutional brokerages. This will invariably attract strategic partnerships with clients and lead to WMS (wealth management service) offerings. Leveraged trading has been operational for quite some time, and the spread betting industry operates in such a manner. The battle is not over by any means, with leading industry groups such as the CFD & FX Association attempting to push back against FCA regulation.
It should be remembered that the FCA is not attempting to prevent CFD trading and spread betting activity, it simply wants to tighten the screws on the industry to such a degree that excess profits and huge potential losses will be avoided. We will see more money being placed on individual trades – not leveraged money – in order to enjoy the same returns that they did previously. This will repel casual traders who simply don’t have the money for CFD trading purposes. The market will shrink as a result. However, larger brokerages will maintain their operations by focusing on big market players. Since most of the money is concentrated in the hands of a few, less risky betting will take place with low income traders. As a result, knowing their broker is FCA regulated means these traders can continue trading confidently and by the law.