The Financial Conduct Authority (FCA) is taking a hard-line approach with spread betting brokers in a bid to stamp out practices considered risky, limiting the vulnerability of traders, particularly those less experienced.
For many years, considerable sums of money have been lost by inexperienced traders spread betting across all types of markets, from forex and indices to stocks and commodities, prompting the FCA to implement tighter industry regulations.
In December 2016, the FCA proposed a significant tightening of spread betting regulations, hitting the retail spread betting industry hardest. Subsequently, many investors panicked, selling shares in brokers and wiping hundreds of millions off both the FTSE 100 and FTSE 250 in a matter of hours.
CFDs targeted due to high risk
The main trading instrument causing the most concern for the FCA is contracts for difference (CFDs). CFDs enable any trader to place a spread bet on a particular financial instrument, such as a company, crude oil or even gold. Nevertheless, the difference between betting on a CFD and a traditional investment in a stock is that the former action does not require a trade to take physical possession of the instrument. Further still, UK traders are not required to pay stamp duty on any CFD profits. It’s this taxation benefit that makes CFDs so appealing to the novice trader.
With CFDs, traders can bizarrely take a position that’s significantly higher than the actual cash value in the account, due in no small part to margin and leverage.
Leverage has been ring-fenced by the FCA as the primary cause of problems for inexperienced traders. They calculated that by multiplying profits or losses, individuals could find themselves heavily in debt to their broker.
What’s the impact on UK spread betting products?
The FCA is working to put an end to the days of inexperienced traders losing significant sums of money by trading in financial markets with unsustainable levels of leverage and inadequate expertise in the financial markets.
By reducing the available levels of leverage to new traders, the FCA is working to limit the downside risks that often go unremarked. A number of FCA-compliant UK-based spread betting brokers are taking the decision to limit the products they make available to clients in preference of investing resource in its overall platform and services.
Some brokers are also opting not to allow their clients to trade in binary options for fear of falling foul of future FCA regulation. Meanwhile, other FCA-approved spread betting companies are also looking at implementing limited-risk trading accounts for trading newcomers.
So how do you choose the right UK spread betting broker?
For those wishing to be able to trade confidently, with reduced risk and to the letter of the law, it is advised that you seek a broker that’s FCA-approved. Ultimately, the FCA is not wishing to stamp out spread betting and CFD trading activity altogether, it is merely attempting to put a stop to excess profits and the threat of incurring vast losses for those new to financial markets.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.