FSA Warns Spread Betting Firms About Practices

The head of the Financial Services Authority in the UK issued a condemning letter to the CEOs of the country's spread betting firms and warned them that if certain business practices aren't changed or cleaned up some companies could face severe regulatory action.

The letter stirred up a long lasting debate in the Interactive gaming industry of whether or not the FSA or the Gambling Board should have jurisdiction over spread betting firms. The UK government has remained firm that since spread betting firms deal in the business of the financial outcome of the markets they should be governed by the FSA.

In his letter to companies, FSA Department Head Nausicaa Delfas warned firms to clean up their act to protect investors, or face heavy fines in the future. The FSA criticized firms for luring customers with hard-hitting promotions while failing to make the potential risks of spread betting clear.

During its inception and early years of operation spread betting was mainly a fad for London professionals in the investment industry who would bet on the movement of financial markets and currencies.

Over the last year or two though spread betting has grown in popularity and the concept of winning or losing more depending on the outcome of an event spread to sports betting. The allure of punters being able to make more off a team if it wins big, but also lose more if it loses big, has changed the face of spread betting, and the FSA has taken notice.

As spread betting grew in popularity over the last year so did the number of new bettors taking a chance on the concept.

Figures show the number of people opening accounts is rising by around 20 percent a year, with around 80 percent of those opening up accounts online. The FSA is concerned that inexperienced investors may be using spread betting without fully understanding all the risks.

These include people failing to realize they could end up paying far more than their original stake if the markets turn against them, or if the score in a football game is far higher or lower than expected, for example.

In its letter the FSA sharply criticized spread betting firms that failed to warn customers that past performance had no bearing on future outcomes and those that buried risk warnings deep in the small print.

Robin McIvor, spokesman for the FSA, said the letter came more out of increased marketing campaigns for spread betting firms than anything else and that there were really only a few companies that were using questionable business practices.

"There are millions of new financial advertisements every year," McIvor said. "Although the majority are not misleading, there are inevitably some that slip through the net and we will be concentrating on these areas."

In its letter the FSA called on companies to assess the suitability of people for spread betting before actively targeting them with promotional and marketing literature.

The FSA confirmed it would be prepared to impose fines on companies that continued to flout regulations by misleading customers through financial promotions.

Not all spread betting firms are opposed to the letter or its recommendations.

Tom Hougaard, chief market strategist for City Index – one of the largest spread betting firms in the UK, said his firm welcomes the letter and his hopeful the FSA will follow through with the fines if companies continue to be out of line.

"It's about time, we feel that some companies are getting away with murder," he said.

Click here to view the letter.