There is no doubt that spread betting is one means to accrue a substantial profit within a relatively short period of time. Of course, this assumes that the trader is highly skilled and that the platform in question is reliable. It is unfortunate that as of late, some firms were given a rather stern warning by the Financial Conduct Authority (FCA) in regards to their practices. The FCA found that a handful of companies operating in the United Kingdom were not “in line” with existing rules and regulations (1). This is not the first time that regulators have had to take action against unscrupulous practices and some believe that tighter restrictions may soon be put in place. How does the FCA determine whether or not a firm is following official guidelines and perhaps more importantly, is spread betting as dangerous as some believe?
The Role of Risk Warnings
One of the first metrics that the FCA will determine is whether or not the firm in question highlights the risks associated with CFDs and spreadbetting to the customer. This is legally required and in some cases, the ways in which this information is provided can be insufficient. As a result, the novice investor may have a false sense of security which leads to poor decisions.
Was the Investment Appropriate?
The FCA and the Financial Ombudsman Service will also look at whether or not the investment was deemed to be “appropriate”. This can vary from case to case. The four major factors which will be taken into account are (2):
- How clearly the concept of spread betting and the inherent risks were explained to the client.
- The experience of the trader in question.
- Whether the “appetite for risk” was appropriate for the trade involved.
- The ability to recover losses that exceed the initial stake.
Larger firms such as CMC Markets will always disclose the risks as well as the mechanics behind spread betting in their terms and conditions. It is the responsibility of the investor to read these details and to make the appropriate decision.
Correct Pricing
In February 2016, the FCA released a statement summarising some of its findings. One of the issues which was highlighted was that smaller firms may be manipulating the price of the spreads themselves. Unsurprisingly, the Financial Ombudsman Service takes any type of price fixing very seriously. If they find that the offered price immensely differed from the open market price at the time, they may begin a formal investigation (2). They might also refer to the Unfair Terms in Consumer Contracts Regulations of 1999 to see if the conditions were violated as the result of any price discrepancies.
Spread Betting: A Roll of the Financial Dice?
It is unfortunate that a handful of unscrupulous firms within the United Kingdom have somewhat tarnished the concept of spread betting. We should be quite clear that much like any type of financial investment, there are natural risks associated with CFDs and spreadbetting. These risks can be magnified if leveraged trades are utilised. However, this does not signify that spread betting in and of itself is fraught with dangers. It is rather the strategies of the investor that will dictate the success that he or she can expect.
Tighter Future Regulations?
Will we witness tighter regulations in 2017? This is not yet certain. The fundamental mechanics behind spread betting are sound. It is rather the question of whether the FCA can modify its current stipulations to hold untruthful companies accountable for their actions. Also, the criteria for risk statements within the terms and conditions may be modified to provide a clearer explanation to the potential client. However, it is not yet clear if the FCA will take any definitive action.
The bottom line is that both CFDs and spread betting positions are excellent ways to accrue wealth over time. This is assuming that the investor has gained experience and appreciates the risks that are naturally involved. This is also why only the most reputable online platforms should be selected before entering into this exciting industry.