For Britons who play the markets for a living, the collapse of spread-betting firm WorldSpreads Group Plc was the moment the financial crisis got personal.
About 15,000 clients, some of whom work for banks and stockbrokers, face losing cash in their personal WorldSpreads accounts after they were frozen last month. The London-based company was put into administration, a form of U.K. bankruptcy protection, on March 18.
“It’s a woeful situation,” said Richard Jennings, 38, a former fund manager at West Yorkshire Pension Fund in Leeds, England, which oversees assets for the region’s government employees. He had more than 100,000 pounds ($159,400) in his WorldSpreads account when it collapsed. “We want some answers from the administrators.”
WorldSpreads is being probed by regulators who are poised to seek a police investigation, according to a person with knowledge of the case, as accountants wind down the company and uncover a 13 million-pound shortfall in client funds. Spread betting, which resembles futures and options trading, is a popular way to speculate on stocks in the U.K. It’s regulated as gambling, not investing, meaning firms’ clients don’t pay tax unless it’s their primary source of income.
WorldSpreads’s collapse renews concern that financial companies may not be segregating clients’ money. The Financial Services Authority has said it plans to increase scrutiny of spread-betting companies and other firms that hold client funds after the demise of WorldSpreads, which followed the collapse of brokers MF Global Holdings Ltd. in October and Pritchard Stockbrokers Ltd. in March.
“Since MF Global happened, I’ve got no faith in the auditors, no faith in the regulatory system,” said Nirav Shah, who had 250,000 pounds frozen across his five accounts at WorldSpreads. “It’s all been abused. It’s going to happen time and time and time again. Who’s next?”
Jennings has formed the WorldSpreads Action Group, which represents 18 clients who each stand to lose more than 100,000 pounds if the company can’t meet their claims. At least three of these people have day jobs working for financial firms in London, said Jennings, who now runs Spread Bet Magazine, an online publication.
His group plans to navigate the compensation process and examine whether it has a legal recourse against the company’s executives. Former Chief Executive Officer Conor Foley stepped down on March 14, two days before WorldSpreads had its shares suspended and said it identified a hole in its accounts. Former Finance Director Niall O’Kelly resigned in February.
Firms such as IG Group Holdings Plc and CMC Markets Plc let clients take positions on markets without buying or selling actual securities, currencies or futures. IG Group says British spread betting has grown 10-fold in 12 years as the internet has made wagers easier. Almost 100,000 Britons regularly made spread bets last year, compared with 91,000 in 2010, according to Sydney-based research firm Investment Trends.
The companies profit through the initial spread, or the difference between the price offered to clients on opposite sides of the same trade. They also charge interest on funds loaned to clients to boost the size of their trades.
IG Group, CMC, City Index and Gekko Global Markets aren’t involved in WorldSpreads’ failure and are not the subject of any regulatory actions. Wanting to distance themselves from WorldSpreads, the firms have written to clients in the last four weeks to assure them their funds are held in separate bank accounts to the firms’ own working capital.
“Small, badly managed firms occasionally fail,” said Tim Howkins, CEO of IG Group, whose 41 percent market share makes it Britain’s biggest spread-betting firm. “It’s not something that’s unique to our industry.”
WorldSpreads, which first sold shares to the public in 2007, lost 1.3 million euros ($1.7 million) in the 12 months to March 31, 2011 as it spent more on technology and risk controls. The previous year it made a profit of 4.7 million euros.
The FSA is being wound down following criticism of its handling of the run-up to the financial crisis, which left four banks requiring government bailouts. The organization will be replaced next year by separate regulators for banks and markets.
One FSA line of inquiry is whether WorldSpreads directors encouraged clients to buy the firm’s stock in the weeks before its collapse, according to a person with knowledge of the investigation. That may breach rules preventing execution-only brokers from providing financial advice and giving investors misleading information, said the person, who declined to be identified because the allegations are unproven.
Paul McSharry, a spokesman for Foley, declined to add to the former CEO’s statement, issued last month. That statement said his resignation was unrelated to WorldSpreads’s problems, which he first learned of in the March 16 press release.
WorldSpreads customers want to “try to understand whether or not there was any wrongdoing,” said Jennings.
The City of London Police said it doesn’t comment “on whether individuals or organizations are subject to ongoing investigation,” according to an e-mailed statement.
Most clients should be covered by the Financial Services Compensation Scheme, a government-backed, industry-funded program that pays out when companies go bust, according to KPMG LLP, which is winding down WorldSpreads. The FSCS protects consumers’ deposits up to a limit of 50,000 pounds.
The prospect of a refund doesn’t reassure Christian Vasseur, a 43-year-old Frenchman who says he can’t access 10,000 euros he deposited in his WorldSpreads account on March 16, the day the company disclosed the accounting irregularities.
“I have lost my confidence in this industry,” Vasseur said. “I will be a while without trading. I can’t give any more credit to the warranties provided by a broker.”
KPMG says it has written to customers to confirm what they are owed and will hold a meeting for creditors around the end of next month. It hasn’t published a full list of creditors.
“It’s a wake-up call to the whole industry to make sure they have strong corporate governance,” said Akshay Kapoor, a director of Gekko Global Markets, which has 12,000 spread-betting clients, who said he was “absolutely appalled” by WorldSpreads’s collapse. “The safety of client money must be paramount.”
The FSA requires all client funds to be kept in segregated accounts. In July 2010, the regulator said it was concerned that some spread-betters were using clients’ money to fund business operations. Chris Hamilton, a spokesman for the FSA, declined to comment on WorldSpreads given the investigation.
No ‘Infinite Faith’
Other spread-betters say they haven’t been hurt by the demise of WorldSpreads, whose 14 million pounds of revenue in 2010 was dwarfed by IG’s 320 million pounds. CMC Markets, the U.K.’s second-biggest spread-betting firm, said it has gained WorldSpreads customers in the last few weeks. City Index, the third-largest, had a 15 percent increase in new accounts in the seven days after WorldSpreads’s closure.
“We all are vying for their business,” said Angus Campbell, head of market analysis at Capital Spreads, the U.K.’s fourth-largest spread betting firm and a unit of London Capital Group Holdings Plc. “On average, their client size is relatively small.”
Sam Austen, an independent trader in London who says he had less than 5,000 pounds in his WorldSpreads account when the firm collapsed, said he will continue to speculate, especially on the smallest stocks in emerging markets. He said he moves his cash among different spread-betting companies.
“I don’t have infinite faith in anything, particularly the financial world,” said Austen. “It felt like a theft. It was a good reminder of the precariousness of the financial system.”