Threat of regulatory crackdown hits spread-betting shares

The news of a potential regulatory tightening around financial spread betting has hit the shares of leading spread betting companies.

Friday’s late announcement by the European Securities and Markets Authority (ESMA) that it was looking at a potential ban on the promotion of binary options to retail customers sent the shares of leading operators into dramatic decline. In trading on Monday, IG Group’s share price fell by more than 12%, while shares in Plus500 dipped by 17% and CMC Markets lost almost 14%.

ESMA said that it had been concerned about the offering of speculative financial products for some time and that binary options could be too risky for retail clients. The regulatory body also said that it would consider bringing in restrictions on the sale and marketing of contracts for difference (CFDs) to the retail market. The measures under consideration include the imposition of leverage limits, a limit on customer losses, a restriction of incentives to trade and the implementation of standardised risk alerts across the industry. A consultation period on the potential changes will begin in January, and any subsequent new regulatory measures are likely to be in place for an initial three-month period.

Regulator bodies in a number of countries have already introduced tougher regulation on financial spread betting brokers, including the Financial Conduct Authority (FCA) in the UK, which will begin regulating the market for spread betting in January 2018. The FCA has previously issued a warning that the majority of binary options customers lose money when betting on these products, and it has been reported in the UK press that 2,605 people have lost a total of £59.4 million in scams related to binary options since 2012.

Reacting to the news, IG said that the proposed measures would not have a major impact on its business for this financial year, though there could be long-term implications. They said they supported most of the proposed reforms of the market, but objected to the suggested leverage restrictions, which it described as ‘disproportionate’ and warned that retail clients could instead turn to companies outside the EU beyond the scope of regulation.

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ALL INVESTING INVOLVES RISK. Investing, Derivatives, Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.
ESMA & FCA Risk Warning – “CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 68-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk”