$1 Billion In Lost Value As UK Watchdog Targets Financial Spread Betting

Posted on: December 6, 2016, 03:00h. 

Last updated on: December 6, 2016, 02:36h.

Financial spread betting industry shake-up causes stock to plunge
Newly proposed regulations caused shares in financial spread-betting companies to plunge drastically. It’s hardly necessary for us to point out the irony here. (Image: Yangon Stock Exchange)

Shares in the UK’s financial spread betting industry plunged today, with more than $1 billion wiped off the value of market-leader IG Group in a matter of minutes, as the UK’s Financial Conduct Authority (FCA) promised to crackdown on the lightly regulated industry.

The authority believes that too many consumers are being drawn towards spread betting without understanding the risks; ie, that, in certain, extreme cases, it is possible to lose up to 200 times your stake very quickly.

What is Financial Spread Betting?

Spread betting allows people to speculate, or bet, on the price movements of financial markets without having to own stock, which can be an expensive outlay.

For example, you can “invest” in a company, or bet on the rise and fall of currency markets, for as little as a few pounds.

Should your stock go up, you will accrue money, even though you don’t really own shares, but should your stock plunge, as the IG Group’s did so disastrously today, you will end up owing money.

It’s called leveraged betting, and the fact that some companies allow leverage of up to 200 times a customer’s stake means that people can suddenly accrue large and unexpected losses. Around 80 percent of all spread betting customers end up losing money.

“Swissie” Disaster

In January 2015, the Swiss National Bank scrapped, without warning, the €1.20 ceiling for the Swiss franc against the euro, which had been introduced in stop the Swiss currency from surging in value.

Many amateur traders, who had bet against the “Swissie”, ended up with five-figure debts as a result.

The UK’s Daily Telegraph newspaper cites the case Tomas O’Comartuin, an Irish supply teacher who earned just €25,000 ($26,760) per year from his job, who was faced with a bill of nearly £280,000 ($354,754) when the currency suddenly surged in value.

The industry is not regulated by the Gambling Commission, but by the FCA, which has decided enough is enough, and that far more stringent controls are needed.

Tighter Regulations

The regulator wants to set a leverage limit of 25 times for new customers with under 12 months’ active experience of trading.

Leverage for all retail clients should be capped at 50 times, it said, with stricter limits across different types of assets, according to their respective level of risk.

The FCA said it has serious concerns that customers lack “adequate understanding” of the risks involved, and that warnings must be made more clear. It will also ban companies from offering welcome bonuses to entice new clients.