10.Spread Betting Regulation
The spread betting industry in the UK is primarily regulated by the Financial Conduct Authority (FCA). The FCA oversees and licences spread betting firms.
In addition, it prosecutes firms or individuals that engage in fraudulent or unfair business or trading practices. The FCA is one of the most respected regulatory authorities worldwide, providing strict oversight and regulation of investment and trading firms.
It has oversight of virtually all financial markets, including – in addition to spread betting – stocks, commodities, forex, binary options, and CFD trading (contracts for difference).
Since spread betting originated in the UK, the FCA is the original regulatory authority of spread betting.
Spread Betting Regulation – the Players
The FCA is the primary, overarching regulator in charge of spread betting. However, it is supported in its work by several other regulatory bodies. The following are the five major regulators that are involved in overseeing spread betting companies and the practice of spread betting:
- The Financial Conduct Authority
- The Prudential Regulation Authority
- The Financial Ombudsman Service
- The Financial Services Compensation Scheme
- The Financial Services Register
Below is a detailed description of the function and authority of each regulatory organisation.
Financial Conduct Authority (FCA) – The FCA is an independent regulator of more than 50,000 financial services companies and financial markets in the UK. The organisation, which is funded by member fees, licences, oversees, and regulates investment firms, including spread betting companies. It reviews companies’ business plans, financing, operational systems and internal controls, and verifies the qualifications of senior management personnel to operate a financial services firm.
The FCA’s enforcement authority extends to regulatory, civil, and/or criminal proceedings to protect investors when companies violate the FCA’s established operational standards for investment companies. Enforcement actions may include cancelling a firm’s licence to operate, suspending a company or certain individuals within a company from engaging in specific investment-related activities, levying fines, and criminal prosecution.
Prudential Regulation Authority (PRA) – The PRA, formed as part of the Financial Services Act of 2012, operates as part of the Bank of England, the UK’s central bank. Its main role in regulating investment companies is to help ensure that the companies are financially sound and sufficiently capitalised to manage market risk. In times of market volatility or uncertainty, the PRA may require firms to maintain higher levels of cash reserves.
Financial Ombudsman Service (FOS) – The Financial Ombudsman Service, or FOS, was created by the Financial Services and Markets Act of 2000. It helps to settle disputes between financial services firms and retail clients. A spread bettor might, for example, contact the FOS if it has a problem with withdrawal requests made to a spread betting company.
Financial Services Compensation Scheme (FSCS) – Spread betting firms are required to contribute to the FSCS, which was also created by the Financial Services and Markets Act 2000. The FSCS provides investors who trade with licensed firms financial compensation – up to a maximum of £50,000 – in the event that the firm ceases operations or is otherwise unable to meet its financial obligations to clients.
Financial Services Register (FSR) – The Financial Services Register in the UK is a public record, maintained by the FCA, that provides information on companies and individuals that are licensed participants in the financial services industry and under the purview of either the FCA or PRA.
Licensing and Authorisation by the FCA
In order for a spread betting firm to be licensed and authorised by the FCA to operate in the UK, it must abide by several key regulations that govern trading firms in the financial services industry.
Some of the primary requirements of authorised spread betting companies are as follows:
- Betting companies have to keep client funds separated from their own money. They cannot hold or commingle client funds in their business bank accounts.
- They must operate using business methods that reflect fundamental fairness for clients. This covers things like honestly reporting the fill prices for client orders and using systems (such as trading platforms) designed to execute client orders with optimum efficiency and in a way that favours the client rather than the trading firm.
- Spread betting companies must participate in the Financial Services Compensation Scheme (FSCS). This regulatory body is a sort of “fund of last resort” that compensates clients of trading firms if they have lost money as a result of the firm going bankrupt and/or out of business.
- Investment firms must be adequately capitalised to ensure financial soundness. The financial health of companies that offer spread betting is reviewed and evaluated by the Prudential Regulation Authority (PRA) of the Bank of England, which was created in 2012 to work alongside the FCA. The PRA looks at how much capital firms have and evaluates it in relation to current market risk.
- To obtain a licence, a prospective spread betting company must submit an application to the FCA. They must demonstrate that it has a solid business plan and that its principals have the necessary knowledge and experience required to operate a trading firm.
- Spread betting firms must advertise their services using clear and honest language. For example, all FCA-authorised firms that offer leveraged trading must present both existing and potential clients with clear statements explaining the risks involved in spread betting and the specific risks inherent with leveraged investments.
Spread Betting with an Authorised vs Unauthorised Company
You can choose to do business with an unlicensed, unregulated trading company, but doing so is not considered a wise decision. There is, unfortunately, widespread financial fraud within the trading industry. Many traders have lost huge sums of capital to unscrupulous trading firms.
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You can easily check and verify that any spread betting company you’re considering opening an account with – or already have an account with – is a licensed company, authorised by the FCA. All authorised companies will have their licence number displayed on their website.
However, just checking the company’s website may not be sufficient, as some unauthorised companies have been caught posting the licence number of an authorised company on their site, trying to pass as an approved investment firm.
Therefore, the safest course is to check with the Financial Services Register to make sure the company is listed. The Register maintains a list of all companies regulated by either the FCA or the PRA.
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Recent Developments in Spread Betting Regulation
In the summer of 2018, the European Securities and Markets Authority (ESMA) – the European Union counterpart to the UK’s FCA – moved to tighten trading restrictions on many types of financial markets, including spread betting. The new rules primarily concern retail traders and the amount of leverage they will henceforth be able to access.
ESMA’s focus is on the level of risk that high leverage carries for individual retail traders who trade instruments such as CFDs and forex currency pairs, and the new, lowered leverage limits will definitely impact traders who make financial spread bets.
ESMA’s new rules cap maximum leverage at 30:1. Prior to this, some firms offered leverage as high as 200:1. The FCA is considering setting maximum leverage at 50:1.
The new regulations are controversial, in part because the lowered leverage limits are only being applied to individual retail traders – “professional traders” are exempted.
Market analyst, Justin Bates, of investment bank, Liberum Capital Limited, sees the new regulations as threatening to squeeze both small investors and small trading firms from the markets at the expense of professional traders and firms who can easily put up any additional margin required.
It’s ironic that the traders who can most easily afford the increases in margin requirements will instead be allowed to continue enjoying the benefits of having access to high leverage.
In addition to the changes in leverage requirements, ESMA is also imposing stricter marketing rules, including a requirement for increased risk warnings from trading and betting firms.
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The spread bet markets are regulated by the FCA and its partnering regulatory bodies, such as the PRA and FOS. The FCA is likely to follow ESMA’s lead and implement new restrictions on spread betting in the near future.
However, the FCA has traditionally maintained a relatively friendly attitude toward the “home-grown” spread betting industry, working closely with major spread betting firms in designing and implementing regulations.
Spread bettors can best protect themselves and their investments by doing business with reputable firms authorised by the FCA. Regulatory bodies provide important protection for investors from financial fraud.
CHAPTER QUICK LINKS
- 2.Why Spread Bet
- 3.Who Should Spread Bet?
- 4.How Does Spread Betting Work
- 5.History of Spread Betting
- 6.Markets You Can Spread Bet
- 7.Types of Spread Bet
- 8.Risk Management Tools
- 9.Sports Spread Betting
- 11.How Spread Bets are Priced
- 12.Spread Betting Examples
- 13.Spread Betting Strategies
- 14.Make a Living
- 15.Spread Bettor Mistakes
- 16.Risks of Spread Betting
- 17.Beginners Recommendations
- 18.Next Steps