What's going on?
Shares of popular spread-betting firms like IG Group and CMC Markets fell by about 10% on Monday, after the European financial markets regulator said it was considering placing stronger-than-anticipated limits on the amount that individuals can borrow to invest in financial products on those platforms.
What does this mean?
Spread-betting firms allow people to trade using “contracts for difference”: financial products where investors make a bet on the price direction of on an underlying investment, like a single stock or an index of stocks (e.g. the FTSE 100). These firms only require their clients to actually put up a fraction of the total size of their stake, effectively allowing people to bet using borrowed money. This enhanced “leverage” often leads to amplified gains, but it also means big losses – and regulators in Britain and Europe are cracking down. The European regulator is proposing to significantly restrict such borrowing – likely hurting the revenue of these online brokers.
Why should I care?
For you personally: These products arguably resemble gambling more than investing.
Major spread-betting firms often sponsor soccer teams, and their logos appear alongside those of the online bookmakers they resemble. If a client doesn’t have enough cash in their account to cover a loss, outstanding positions can be automatically closed, locking in losses and meaning “investors” are often unable to benefit from the tried-and-tested “buy and hold” strategy of investing.
The bigger picture: Reforms have empowered Europe’s market regulator.
As of January, a whole new swathe of financial regulations, called MiFID II, is about to envelop European Union countries. The European regulator, ESMA, has been empowered in recent years by changes to its mandate that allow it to impose laws, rather than simply recommend them to individual states within the EU. The result is already a much stricter regulatory environment – which can both benefit the consumer and cause headaches for the industry.