Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Regulator to investors: the house always comes out on top. In the world of spread-betting, 82 percent of customers lose money.

That's the takeaway from the Financial Conduct Authority as it announced plans to crack down on the contracts-for-difference industry. The threat was enough to wipe 35 percent off shares of IG Group Holdings Plc, CMC Markets Plc and Plus500 Ltd. on Tuesday.

CFD Dive
Shares in stock derivative brokers sink on FCA proposal for tougher rules on contract-for-difference products
Source: Bloomberg
Intraday times are displayed in ET.

Spread betting and its cousin CFDs allow individual investors to bet on the price of a security or commodity without owning the underlying asset. For investors the concept is simple (it looks like gambling), tax-efficient (winnings are tax free) and crucially offers leverage (to juice your returns).

Of course, the promise that using all this could make you a trading genius was, to put it charitably, aggressive marketing. With that leverage, investors could lose a lot more than their initial outlay faster than they could say goodbye Ferrari.

Offering leveraged products with a high probability of loss to individual investors who may not understand the risk involved is a sure-fire way to attract the attention of regulators. The puzzle is why it took the FCA so long to act.

It now wants to restrict the product to investors who understand and can afford the risks. The regulator will require providers to provide standardized risk-warnings and limit the leverage available to inexperienced customers. Newbies will be allowed to put 25,000 pounds ($32,000) at risk for every 1,000 pounds they invest. More experienced clients will be restricted to 50,000 pounds for every 1,000 pounds -- compared with as much as 500,000 pounds today. Providers will be banned from offering opening bonuses to woo new customers.

Britain is hardly in the vanguard of global regulation here: spread betting is already banned in many countries, including the U.S. The industry had been hit by high profile blow-ups in recent years -- WorldSpreads Group Plc collapsed as long ago as 2012. Cyprus moved last week to tighten up its rules for operators based there. 

Reputation and compliance risks have been growing for years, prompting larger broking firms to reconsider whether it was worth remaining in the business. To add to the pain, low volatility in financial markets had been a drag on income.

The FCA's plan will bring the market more into line with the way the rest of the financial services industry is regulated. It will constrict revenue growth and make it harder for firms to lure customers from their peers. Plus500 said on Tuesday revenue at its U.K. unit, which accounts for about 20 percent of sales, will be materially affected.

Two risks remain. Other European countries are likely to introduce similar leverage limits, according to Peter Lenardos, an analyst at RBC Europe. Also, if the British industry resists pressure to overhaul itself, it's possible some the tax advantages its enjoys could come under heightened scrutiny.

IG's Slide
Tuesday's fall brings the stock to the lowest since 2013
Source: Bloomberg

The mystery is why shareholders and companies like IG, CMC and Plus500 had been so phlegmatic up to this point. IG made no mention of the review in its trading update last week.

It's a reminder gambling is never without risk -- especially if it's on a regulator's inertia.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net