More than £1bn has been wiped off the stock market value of the spread-betting industry after the City regulator announced a clampdown to protect inexperienced retail customers from unexpected losses on complex trades.
The Financial Conduct Authority said it was concerned about people opening online accounts with spread-betting providers without understanding the products they were trading. A representative sample of customer accounts found that 82% lost an average of £2,200 on the products, known as contracts for difference (CFDs).
The regulator proposed a series of measures to protect consumers, including standardised risk warnings, compulsory disclosure of total profit-loss ratios across all clients, limits on trading using small amounts of capital and banning companies from using bonuses to tempt people to start trading.
Shares in publicly traded spread-betting companies plunged after the announcement. Shares in IG Group, the biggest operator, plummeted by 32% to 532p, wiping more than £900m off its value.
IG said some companies’ marketing of CFDs fell short of appropriate standards and the FCA’s proposals could be good for customers. The proposals did not appear to apply to firms offering CFDs from outside the UK, where standards are often lax, it said.
CMC Markets dropped by 30% to 125p, cutting its market value by more than £160m. Founded and run by Peter Cruddas, the Brexit backer and former Conservative party treasurer, CMC floated on the stock market in February at 240p a share and has since lost more than 45% of its value. The fall knocked about £90m off the value of Cruddas’s 57% stake in the company.
AIM-listed Plus500 lost 28%, or £160m, as its shares tumbled to 388p, and shares in Playtech, which makes gambling software, also fell.
CFDs are derivative products that allow people to gamble on price movements in shares, commodities and currencies without owning them. Customers can increase the size of their trades by putting down a small amount of capital to maximise potential gains and losses.
A leverage ratio of 100:1 lets someone take a £10,000 position with a £100 deposit. The FCA proposed limiting leverage to 25:1 in a customer’s first year of trading and 50:1 for more experienced consumers.
IG said at the time the move could cost it as much as £30m after customers with no means of paying racked up thousands of pounds of losses from betting against the franc. IG also took a hit by closing customer positions at worse prices than it was able to get in the market.
The number of companies authorised by the FCA for retail CFD business has roughly doubled to 97 since 2010. The longest-established companies started in the 1970s and 80s by offering bets to relatively knowledgeable clients, but there are now about 125,000 active UK customers and 400,000 based overseas, with a total of £3.5bn on deposit with providers.
Christopher Woolard, the FCA’s director of strategy and competition, said: “We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses.
“We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified and firms make sure that retail clients are aware of the high risks involved in trading these complex products.”
The FCA has been examining the industry since July 2015. In February, it told companies to do more to protect customers from losses after finding that checks on their suitability and warnings about risk were inadequate.
Jake Green, a partner at law firm Ashurst, said the regulator’s proposals showed it was intervening in products, rather than enforcing good conduct, which could lead to some companies folding or being taken over.
“This will come as a shock to the UK industry, which received detailed briefings from the FCA earlier in this year, where this was not indicated,” he said.
The FCA has asked the industry and other interested parties for comments on its proposals by 7 March 2017.
