Why is the FCA Leaning on Spread Betting Companies?
Why is the FCA Focused on Companies that Adhere to the Rules?
The spread betting industry in the United Kingdom is coming under increasing pressure from the FCA. The regulated spread betting industry feels as if it is being improperly treated while the criminal element gets a free pass. The FCA (Financial Conduct Authority) authored a consultation paper recently in which it limited the leverage extended to clients at regulated spread betting companies. This had a negative effect on the share prices of leading spread betting companies in the United Kingdom, as evidenced by sharp declines on the LSE (London Stock Exchange). The new laws are designed to protect traders from being overly indebted when markets go against them.
At present, spread betting leverage is limited to x 50. For most traders however, that is substantial and sufficient. The problem is that professional spread bettors are now being hamstrung by their inability to generate profits, especially when comparisons are drawn to international spread betting companies in Europe, Australia and beyond. This creates poor competition by global standards. Spread betting companies in the United Kingdom are concerned that unregulated enterprise is flourishing while those complying with the rule of law are being penalized. Indeed, the FCA consultation paper makes special provision for unauthorized businesses. These include clones of existing brokerages and other scam companies. The FCA paid scant attention to the way it will deal with these companies, and is instead focusing its activities on clamping down on all regulated brokerages.
Unauthorized Firms Not Taken Seriously by the FCA
The FCA consultation paper makes mention of the sharp uptick in unauthorized brokerages and investment scams. It also cites a sharp rise in alleged scams linked to binary bets. Spread betting companies have been adversely affected by the fly-by-night scams offered by binary options trading enterprises – regulated or unregulated – promising guaranteed wins with 60 second trades. Regulated brokerages are seeking greater vigilance from the FCA when it comes to weeding out rogue operators. Various questions have been raised regarding the reasons for FCA inaction on regulatory measures. Major spread betting companies have been warning against the unintended consequences of the FCA clampdown.
Spread Betting Losses Will Be Capped at the Value of a Trader’s Deposit
Nonetheless, Q3 2016 trading profits at many UK spread betting companies have seen an uptick in performance. The spread betting industry across Europe is estimated to be worth $4.4 billion, but the FCA claims that the majority of investors end up on the losing end. FCA measures will be implemented later in 2017, and the effect of this is going to prove telling on company profitability. Companies that focus on inexperienced clients are likely to feel the heat more than spread betting enterprises focusing on traders and investors with greater market knowledge. European Union rules do not place any restrictions on leverage, and this is making it difficult for UK spread betting enterprises to compete with their neighbors. Nonetheless, UK giants in the industry are offering limited risk accounts where traders can no longer lose more than they have available in their accounts.
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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.