Spread-betting firms’ shares plunge as EU watchdog plans crackdown

A crackdown by the European regulator on high-risk online bets has sent shares in spread-betting firms plummeting.

The European Securities and Markets Authority (ESMA) said late on Friday it was considering a ban on the marketing, distribution or sale to retail clients of binary options, amid fears they are too risky for amateur speculators.

Binary options allow speculators to bet on whether the price of financial indices such as a share index, commodity (like gold) or currency will rise or fall over a given period of time, often varying between 30 seconds and five minutes.

ESMA is also considering imposing restrictions on the marketing, distribution and sale of contracts for difference (CFDs) to retail clients. Measures include imposing leverage restrictions, a guaranteed limit on client losses, restricting trading incentives such as bonus offers, and issuing standardised risk warnings.

Shares in London-listed spread-betting firms plunged on the news. Plus500 fell more than 17%; CMC Markets was down nearly 14% in early trading and IG Group lost more than 12%.

The European regulator said it had been concerned about the provision of speculative products such as CFDs, including rolling-spot foreign exchange products and binary options, to retail clients “for a considerable period of time”.

Some national authorities have already cracked down on the sector, but ESMA said it “remains concerned that the risks to investor protection are not sufficiently controlled or reduced”.

The Financial Conduction Authority, Britain’s financial watchdog, recently announced it would regulate binary options for the first time from January. It warned that the majority of consumers lose money on binary options. There have been been a reported 2,605 victims who lost £59.4m on binary options scams since 2012. The FCA will take over the regulation of binary options from the Gambling Commission from 3 January.

The FCA said it “supports ESMA in its consideration of potential EU-wide product intervention”. It added: “Our domestic policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients is ongoing. Any permanent FCA policy measures would take into account any prospective ESMA measures.”

ESMA will conduct a brief public consultation in January. Any measures would apply for three months but could then be renewed.

Plus500 welcomed the “strong regulatory framework that this will bring to the industry”. It said it had never offered binary options and removed its bonus schemes for the vast majority of its operations in January.

IG said it “seeks to only accept clients who understand the risks involved with its products and how they operate”. The firm said the measures would not have a significant financial impact on its business in the current financial year, but that it was hard to assess the longer-term impact.

It stopped offering its Sprint binary product to new retail clients in January, and revenue from binaries traded in the UK and EU was less than 5% of the company’s revenues in the first half.

IG welcomed most of the measures, but said the leverage restrictions under review were “disproportionate and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage”. It warned that this could push punters to trade CFDs with unregulated firms based outside the EU.

Rival CMC said: “Fair client outcomes have always been a focus, with margin close-out and standardised risk warnings already in place throughout the group.”

It said the ban on binary products would not have a material impact on its business, as they only generated £2.1m of revenues in the first half of 2018: “Proposed margin changes are likely to have an impact on how clients trade, although at this stage it is not possible to quantify the impact.”

The firm focuses on wealthier clients and says it has one of the highest revenue per client in the industry.