London-listed spread-betting firms crashed yesterday afternoon, losing a combined total of £1.3bn "in minutes" after the Financial Conduct Authority (FCA) announced a crackdown on products, reports The Independent.
In a bid to protect investors, the watchdog has proposed tougher rules for "contract for difference" (CFD) products, which allows punters to speculate on a shift in a market without directly owning any of the underlying shares, securities or currencies in question.
As a result, shares in IG Group, which controls about 40 per cent of the market, dropped 30 per cent, "or the equivalent of £800m", while CMC Markets shed 29 per cent, Aim-listed Plus500 lost around a third of its value and Playtech fell seven per cent.
The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
SUBSCRIBE & SAVE
Sign up for The Week's Free Newsletters
Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.
Join more than 350,000 subscribers and keep yourself informed with a selection of The Week’s most interesting, enlightening and entertaining stories - plus daily puzzles.
Latest Videos FromThe Week
Around 125,000 people are active spread-betters, but the FCA found 82 per cent of customers lost an average of £2,200 a year.
"Punters deposit money with the broker and use it as collateral to trade a much larger amount - sometimes as much as 200 times their deposit - and magnify their positions," says the Financial Times.
This means, says the BBC, "that a small movement in the price of shares can result in the security deposit an investor has put up - the margin - being wiped out".
Complex investments are often sold to ordinary investors online and, adds the broadcaster, spread-betting firms are "relentless in recruiting them, by blazoning their brands on football shirts, on public transport and in free newspapers".
Christopher Woolard of the FCA said: "We have serious concerns that an increasing number of retail clients... can incur rapid, large and unexpected losses."
The watchdog's proposals, aimed at saving ordinary investors money, include a cap on the amount of "borrowed" funds that can be traded and for products to carry stricter, standardised risk warnings, as well as stating the proportion of winners and losers.
IG Group said it recognised "shortcomings in the approach to the marketing of CFDs" by certain firms, but argued the proposals were misguided as they would not apply to EU companies that "passport" into the UK.
A small number of companies dominate the market but of the 226 that are active overall, around 130 "promote their online trading from elsewhere in Europe, mostly from Cyprus", says the BBC.
