London Briefing: Spread betting faces a tougher future

Financial Conduct Authority’s report shows 82% of customers lose money trading in CDFs

The Financial Conduct Authority (FCA) is putting forward plans to clamp down on firms selling contract for difference (CFD) products to retail customers. Photograph:  John Stillwell/PA Wire

The Financial Conduct Authority (FCA) is putting forward plans to clamp down on firms selling contract for difference (CFD) products to retail customers. Photograph: John Stillwell/PA Wire

 

If you want to know whether a regulatory crackdown is tough enough, just look at how shares in the sector respond when the new rules are revealed.

The tougher the crackdown, the further the shares will fall – and on that basis, the shake-up in the spread betting industry proposed on Tuesday should be a storming success, for customers if not the spread betting firms.

Well over £1 billion was wiped from the stock market value of the sector as the Financial Conduct Authority (FCA) released a damning report into the £3.5 billion industry.

The City regulator is alarmed at the lack of understanding among retail customers of how complex spread betting products actually work. Clients face “rapid, large and unexpected losses,” the FCA said, as it outlined a number of measures to protect them.

One shocking revelation from the regulator is that 82 per cent of customers lose money when trading in CDFs (contracts for difference), which enable punters to bet on companies at a fraction of the price they would have paid for the shares.

Professional City investors have always used CDFs but in recent years spread betting firms have made a big push to attract ordinary investors. The firms invest heavily in advertising, often sponsoring Premier League football clubs, and the number of firms offering CDFs has doubled to almost 100 over the past six years.

But the 82 per cent of customers who end up in the red lose an average of £2,200 each a year, and for some the losses are far larger. At the moment, leverage limits can be as high as 200:1 but the FCA wants this capped at a maximum of 50:1, with a much lower limit of 25:1 for inexperienced customers.

Firms must make their customers aware of the risks and will be banned from offering bonuses or benefits to promote CDF products.

The FCA’s proposals sent shockwaves through the sector as analysts warned that some smaller firms could go out of business. IG Group, the biggest in the sector, plunged 38 per cent , ad did smaller rival CMC Markets.

That took CMC shares down to 115p, which is bad news for investors who bought into the company at 240p a share when it floated in February. Its founder and chief executive, former Tory party treasurer Peter Cruddas, was one of the biggest personal losers yesterday, as he still owns around 60 per cent of the business. But, like any good bookie, he hedged his bets when the company floated, cashing in shares worth almost £200 million.

Impossible to forge

Bringing in plastic banknotes was one of Mark Carney’s big ideas. As part of his drive to modernise the Bank of England, the governor wanted to replicate what he’d done in Canada, switching to notes that were longer lasting and almost impossible to forge.

Clean, crisp and capable of withstanding a cycle in the washing machine, the new fivers were well received when they came into circulation in Britain in September. The choice of Sir Winston Churchill as the historical figure featured on the new note also went down well.

But the successful launch of the plastic fiver has been overshadowed by the revelation that the notes contain tallow, an animal by-product more commonly used in the production of candles and soap.

There have been protests from vegans, vegetarians and some religious groups – and a petition calling for the Bank to remove tallow from the manufacturing process has now attracted more than 130,000 supporters.

One vegetarian cafe is refusing to accept the notes and a number of Hindu temples have also decided to ban them. The National Council of Hindu Temples said the notes were “a medium for communicating pain and suffering” rather than a medium of exchange.

After the avalanche of criticism he has faced in the wake of the Brexit vote, Carney could have done without the furore over the new fiver – and the ferocity of the backlash looks to have taken Threadneedle Street by surprise.

The Bank casually confirmed the presence of tallow in the notes via a tweet late last month but within days was forced to issue a statement saying it was aware of people’s concerns and would treat them with “the utmost respect”.

The issue had only just come to light, the Bank said, and it was working with its suppliers on a solution. It’s a solution that will need to be applied to the new tenner, featuring Jane Austen, which is due to be launched next summer, and also the new plastic £20 note, featuring artist JMW Turner, scheduled for 2020.

Fiona Walsh is business editor of theguardian.com

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