FSA warns spread betting firms

SPREAD betting companies have been warned by the Financial Services Authority (FSA) to clean up their act to protect investors, or face heavy fines in the future.

In a letter to the industry, the FSA criticised firms for luring customers with hard-hitting promotions while failing to make the potential risks of spread betting clear.

Originally, spread betting was the province of City professionals who would bet on the movement of financial markets and currencies. However, in recent years betting on sporting events has become widespread. The recent Euro 2004 soccer tournament is thought to have made spread betting companies millions of pounds.

But as it has become more popular the proportion of inexperienced consumers placing bets has also risen. Figures show the number of people opening accounts is rising by around 20% a year, with around 80% of those being opened online.

The FSA is concerned that inexperienced investors may be using spread betting without fully understanding all the risks. These include people failing to realise they could end up paying far more than their original stake if the markets turn against them, or if the score in a football game is far higher or lower than expected, for example.

Firms that failed to warn customers that past performance had no bearing on future outcomes and those that buried risk warnings deep in the small print also came under fire.

Robin McIvor, spokesman for the FSA, said the letter was part of a process of 'beefing-up' of regulation of financial advertising and promotions.

'We have changed the way in which we look at financial advertising. Previously we were reactive, but we are now taking steps to be far more pro-active,' he said.

'There are millions of new financial advertisements every year. Although the majority are not miseading, there are inevitably some that slip through the net and we will be concentrating on these areas.'

McIvor denied that fears of a surge in betting once the Olympic Games start later this month had prompted the FSA's warning letter, but said it was a 'happy coincidence'.

In its letter the FSA calls on companies to assess the suitability of people for spread betting before actively targeting them with promotional and marketing literature.

The FSA confirmed it would be prepared to impose fines on companies that continued to flout regulations by misleading customers through financial promotions.