Spread-betters plummet after watchdog attack

THE City’s spread-betting industry was plunged into turmoil today after the watchdog unleashed an attack on the sector that is likely to put some firms out of business.

In a stinging rebuke to an industry that has long been the focus of concern, the Financial Conduct Authority is planning far stricter rules on the sale of products to retail customers. It wants to increase risk warnings and cut leverage on contracts for difference, complex financial products that have soared in popularity.

In the past six years, the number of firms selling CFDs to ordinary punters has doubled to almost 100. Those firms look after £3.5 billion of money on behalf of 125,000 betters. Some offer leverage of 200:1 to inexperienced clients, said the FCA, an amount of risk many of them do not understand. The FCA proposes this should be cut to 25:1 for anyone with less than 12 months’ experience and 50:1 as a maximum.

One devastating finding from the FCA is that 82% of clients lose money, at an average of £2200 each a year. Shares in IG plunged 25% to 589p and in CMC Markets 23% to 143p.

That takes £80 million off the fortune of CMC founder Peter Cruddas, who owns 57% of the firm. Cruddas was co-treasurer of the Conservative Party but quit following a cash-for-access scandal. Plus 500 — which said the move would have a “material” effect — lost 33% to 346p. Christopher Woolard, executive director at the FCA, said: “An increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses.

“We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved.”

The FCA is also clamping down on “binary bets”, which are very short-term punts on events. The industry fears this clampdown will simply drive trade offshore to less-regulated firms.

IG said: “The company recognises that there are shortcomings... however, the FCA’s proposals do not appear to directly apply to firms operating from outside the UK offering CFDs and binaries to clients in the UK on a cross-border services passport from another EU member state.”