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Spread betting clients 'put at serious risk'. A crackdown is coming and it's probably needed

Some 76 per cent of clients studied lost money - and these were people who took advice 

James Moore
Chief Business Commentator
Wednesday 10 January 2018 13:42 GMT
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Spread betting firms offer punters the opportunity to play city traders. Most lose money, the City watchdog has found
Spread betting firms offer punters the opportunity to play city traders. Most lose money, the City watchdog has found (Getty)

It’s the statistics that really damn the spread betting industry, and one in particular.

According to the latest “dear CEO” letter from the Financial Conduct Authority (FCA) some 76 per cent of those who used spread bets – or contracts for difference – who were studied between July 2015 and July 2016 lost money.

What is particularly relevant about the FCA’s research is that it largely covered people who took advice before so doing, or who handed their money over to experts to manage for them on a discretionary basis.

Based on that stat, it’s probably no exaggeration to say that they’d have done better to follow one of the Racing Post’s more successful tipsters.

As such, the FCA’s letter stands as an indictment of the industry’s practices.

Most operators, it says, took a very broad view of whom their product was suitable for to the extent that they could neither define their target market, nor say how they matched their customers needs with the products they sold.

Repeated examples of poor due diligence, poor conflict of interest management and bad remuneration practices were found. Some outfits were paying staff solely for the sales they made.

That’s a bad game to get into when you’re asking people to flog vacuum cleaners for you, let alone complicated financial products through which people can lose many times their initial outlay.

The longer you read through the letter, the less pretty the picture becomes.

It’s true that there the industry has some particularly bad apples, some firms that have behaved far more poorly than others. It is also true that the UK has seen an influx of a number of firms basing themselves in more lightly regulated EU jurisdictions that have taken advantage of EU passporting rules to come in.

But the problems the FCA found were not limited to a handful of hucksters. In some instances they extended across the board. Even some of the more established operators were found to have fallen short of the best as regards practice.

This is the second volley the FCA has aimed at the industry. The last time it created a wobble the issue ended up getting kicked over to Europe to facilitate a coordinated approach, which was sensible, but has inevitably resulted in delays.

This, however, did present the industry, or at least the good parts of it, with an opportunity to show that it could conduct itself in a reputable manner. It doesn’t appear that firms chose to take it.

There are ads all over the interest beseeching punters to come on down and trade, it’s easy, it’s great fun, you’ll makes stacks of cash.

The FCA’s letter makes clear that most people don’t, even when they take advice.

Spread bets, CFDs, they are not without value. They are flexible, and their tax treatment is very favourable. They allow people to profit from falling as well as rising shares and markets, just as the professionals can, which is not to be sniffed at.

But they can be highly dangerous and they need to be sold with care, and only to people who have the means to take a hit, as a result.

This clearly hasn’t happened. It now seems that the FCA is minded to bring the hammer down, and it probably should.

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