UK Edition
Shares in spread betters plummet as FCA unveils plans to clamp down on trading
Shares in spread betting firms plunged yesterday after the country’s financial regulator announced major plans to crack down on trading amid fears ordinary investors are losing money.
Spread betting using a financial product known as contracts for difference, or CFD, allows people to trade on price movements in financial markets, such as stocks and currencies. It is effectively a wager on which direction a particular asset will move.
With rising numbers of ordinary investors using CFDs, the Financial Conduct Authority (FCA) said it was concerned that many people don't understand the risks involved, as it outlined a number of hard-hitting proposals which it said would "protect" consumers.
The news sent shares in IG Group, which controls 40pc of the UK financial spread betting market, tumbling 38pc to 485p, while shares in retail brokerage CMC Markets dropped 37pc to 115p.
Plus500, another CFD provider, slumped 28pc to 366p. A spokesman for Plus500, an online provider of CFD trading, said the FCA's proposals would have a "material operational and financial impact on the UK regulated subsidiary which represents approximately 20pc of the group's revenues".
Analysts warned that the future financial performance of these companies had “gone from low visibility to opaque”.
RBC Capital Markets said: “The regulatory direction of travel is clear, and contagion is likely. The de-rating, negative forecast revisions and souring sentiment are warranted in our opinion. The share price drop of IG and CMC seems reasonable.”
Analysts at Liberum said the FCA had done what investors and the industry had feared.
"Over the medium to long-term we expect this to result in a positive outcome, driving out some of the private and more unscrupulous operators. However, in the short to medium-term we will undoubtedly see a negative impact on growth and profitability.”
The FCA's proposals include plans to force firms offering CFDs to display risk warnings and disclose profit-loss ratios on client accounts.
Other measures include setting lower leverage limits for inexperienced retail clients and capping leverage for all retail clients.
It also wants to prevent firms from promoting CFD products by offering bonuses or benefits on new accounts.
The regulator said there had been several instances of poor conduct across the CFD sector over the past six years.
"This includes firms failing to adequately consider if CFDs are appropriate for their customers, failing to provide adequate risk warnings, and firms offering excessive levels of leverage to retail clients," the watchdog said.
According to its own analysis, 82pc of clients in a random sample lost money on CFDs, with the average loss per client of £2,200.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified."
The FCA is also looking at binary bets, another type of financial betting, which it said was more akin to gambling. It even questioned whether binary bets “serve a genuine investment need”.
Analysts at Numis Securities said stricter regulation would hit both growth and profitability at CMC, while in the short-term, it could dampen sales at IG Group.
A spokesman for IG Group said: "The company recognises that there are shortcomings in the approach to the marketing of CFDs and binaries by certain firms, often operating from outside the UK.
“The company has operated and will continue to operate to the highest standards in the industry, and its initial view is that certain of the FCA proposals could enhance client outcomes."
CMC Markets said it focused on "higher-value experienced premium clients who understand the markets and products they are trading".
"An integral part of CMC's proposition over the last five years is ongoing client education. CMC's business model and strategy is focused on generating revenue from client trading costs and therefore believes in establishing long-term client relationships."