ESMA Gets Tough on Spread Betting

By The Enforcd Team

The ESMA’s new rules on financial spread betting came into force on August 1, and spread betting platforms are working hard to find their feet.

In recent years, the world of online spread betting has been booming. Major platforms such as IG Group and ETX Capital have been reporting stellar results. Despite being high risk and, for most punters, a game they are likely to lose, customers have been flocking to these platforms.

Unfortunately for them, EU regulators were keeping close ties. New rules from the European Securities and Markets Authority banned the sale of binary options to retail clients and restricted the sale of contracts for differences to protect vulnerable investors from high risk.

The news was greeted with dismay from the sector, with most of the leading players forecasting a significant drop in its revenues over the next 12 months. Speaking to Reuters, IG Group’s Chief Executive Richard Hetherington said: “What you’ve had are regulatory rules that apply only to CFDs and are quite onerous, and will relatively make other products more attractive and relatively make CFDs less attractive.”

He was speaking as his company had lowered its 2019 forecasts in the light of the new regulations. Others have followed suit. The message from the sector is clear: the party may not be over but it’s certainly going to be a little quieter for the time being.

Adjusting their approach

There have been plenty of complaints from the sector. A report from earlier in the year which showed complaints against spread betting platforms had fallen was seized upon as an opportunity to suggest this new regulatory clamp down might not be necessary.

For the most part, the market has been doing what it does best and adjusting, and that has got the FCA concerned. IG Group released IG Pro, a trading platform for experienced and professional investors which would allow them to continue trading these products. In order to qualify users must have traded leveraged derivatives in significant sizes over the last four quarters, have a financial investment portfolio greater than €500 and been working in the financial sector with a working knowledge of derivatives for at least a year.

New platforms like that abide with the rules, but what has concerned the FCA is the prospect of alternative CFD products. In a statement the FCA said it was concerned about the prospect of firms trying to get around the regulations by offering similarly high risk and complex structures to retail investors.

In a statement it said: “ESMA makes clear that firms “should pay particular attention to the leverage made available to retail clients and consider whether the product is offered on terms that act in the best interests of the client.”

Among those products, said the FCA were so-called Turbo Certificates which allow investors to make leveraged returns against both the upside and the downside of products. The FCA confirmed that it would be working closely with European regulators to assess the sale of these products and take action if some were needed.

The ESMA’s new rules, have caused concern in the markets. Bigger platforms are having to lower their forecasts and adjust their service offering while smaller platforms may worry about their future. Platforms are working hard to live within the new environment, but in many cases that may see them trying to circumvent rather than comply with the spirit of the new regulations.