The Regulatory Framework - Spread Betting

The Investors Compensation Scheme

All private investors who open spread bets are protected by the Investors Compensation Scheme.

The scheme was brought into law by the '86 Act. It covers all firms authorized by the FCA, obviously including the spread firms. The scheme is not government backed. It's funded by the industry, and all firms, including the spread betting firms, contribute a levy towards it.

The ICS is a rescue fund designed to bail-out private investors in the unlikely event of an authorized firm being unable to meet its liabilities. The scheme only applies to private clients and it only covers debts relating to investment business. So tough luck if you're owed money for fixing the plumbing. Private firms are protected against losses up to a total of £48, 000. The first £30,000 owed is paid in full, and then 90 per cent of the next £20,000.

The spread firms are extremely well-financed. Contrary to any pre-conceived ideas you may have about how bookmakers operate, the spread firms are also very conservatively managed. They survived the crash of '87 and it's hard to imagine them every being unable to meet their liabilities. However, should a default happen, the Investors Compensation Scheme is there, and that £48, 000 limit is high enough to cover practically all spread betting players.

All private investors who open spread bets are protected by the Investors Compensation Scheme.


Given the volume of transactions and the amount of money at stake, the surprising thing about the level of disputes and complaints in spread betting is that it's so low.

Nevertheless, mistakes do arise from time to time. Dealers can misinterpret instructions or key-in the wrong details. Customers may not make themselves clear, or forget which way they traded!

When problems arise, they can usually be put right quickly. All calls to a dealer are taped and it's a simple matter to check back to see if an error was made.

Beyond that, if a grievance arises, the FCA has a clear complaints procedure. The first step is always to speak to the firm concerned. In practice, the spread firms bend over backwards to be fair and will almost always give the customer the benefit of any reasonable doubt.

Failing that, the FCA runs and arbitration scheme. An application for arbitration costs £50, and though the FCA manages the process, the arbitrators themselves are completely independent. If the outcome is not satisfactory, there is a further appeals process.

The Legal Status of Spread Bets

Until the middle of the eighteenth century, betting was regarded almost as a commercial activity, and bets were considered to carry as much legal weight as any other contract.

Unfortunately the courts gradually become clogged up handling betting disputes. In response, Parliament passed a law depriving bets of their contractual status. To this day, almost all bets, no matter how large they may be, are legally unenforceable. Bets are gentlemen's agreements whit no legal substance whatsoever.

Spreads bets are the only exception to this rule. Spread bets are contracts for differences, and section 63 of the '86 Act makes such contracts legally valid, but only under certain tightly defined conditions. The contract has to be an investment and one of the parties has to enter into the deal by way of business.

Thereby spread bets are fully enforceable in law. It rarely happens, but the spread betting firms can sue their customers, and the customers can sue their bookmakers. It is important therefore to spread bet responsibly. If you were to lose a million pounds backing horses on credit with Ladbrokes, as one City figure famously did several times over, in a sense, it's Ladbrokes that has the problem. But if you blow a million pounds to a spread firm, the problem is very much your own. You are liable for the full extent of any losses, so tread warily.

No risk! Guaranteed profits! Financial freedom! - Financial Spread Betting

Advertisements for some spread betting systems or from some trading gurus make spread trading look like a virtual bonanza where everyone's a winner.

But if one thing's certain about stocks, commodity futures, options and spread betting, it's that they're uncertain. Any system that guarantees huge earnings is feeding you a load of "bull."

Spread betters spend their time at computer screens, quickly buying and selling trades within a few weeks or even days - and reacting to continual market swings. They trade in the hope that their spread bets will soar in value in the short time they hold them, and net them quick profits. Sometimes they even use computerized systems that claim to be able to predict the markets.

No doubt about it, this is a risky business. Despite the picture of investing success painted by some spread betting companies' ads or gurus promising you earnings of £500 a day , far more spread betters lose money than make it. Some traders lose big, forfeiting their student loan money, second mortgages or retirement funds. In addition, people who trade on margin or sell short risk losing much more than their investment.

Every time a spread better makes a trade, they pay a commission in the form of the bid-offer spread. That's true whether they buy or sell and whether they make money or lose their shirt.

Read Between the Lines

Learning the language of spread betting can help you separate fact from fantasy when reading an ad or listening to a commercial.

If the ad promises... "The potential to make a six or seven figure annual income from trading is at the ends of your fingertips."

Remember that... It's dangerous to fall for extravagant profit claims. Many are based on hypothetical performance, meaning that no trades were ever really made. And it's far from certain that a bona fide trader will be able to place the same trades as the hypothetical trader. Actual results may not match the hypothetical performance - and even trading advisors with a long track record of success can lose a fortune suddenly.

If the ad promises... "The absolute best trading system with a profit-to-loss ratio of 12-to-1 and an average return better than 18 percent per trade..."

Remember that... Even if the system really has had such successes, past performance is no guarantee of future results and nobody - not even financial experts - can guarantee what the market is going to do from day to day or even minute to minute. No matter how strong the market may seem and how solid a particular company may appear, prices can skyrocket or plummet faster than you can say "Wall Street."

If the ad promises... "Our software signals precisely when to buy and when to sell a particular security, allowing you the opportunity to make money regardless of the market going up or down..."

Remember that... As tempting as it might be to leave your investment decisions in the hands of a software program, the ultimate responsibility for protecting your capital belongs to you. No matter how sophisticated a system for evaluating market entries/exits might sound, there's no way to guarantee the future performance of such systems. If there were, you can be sure that the software developers would be making their money using their programs themselves, not promoting it to others!

If the ad promises... "Our recommendations returned an average annual return of 250 percent. If you can just follow our recommendations, you will make money."

Remember that... There's no fail-safe way to invest without any risk. High-yield investments tend to involve high risk. Be particularly suspicious of sales pitches that play down risk or portray written risk disclosures as routine formalities. Believe the risk disclosures that say you could lose your whole investment. Jumping on a "hot" investment tip is a good way to get "burned."

If the ad promises... "Timothy Smith, who used our system wrote to us, '... at night I work with your trading system for a few hours and am averaging more than $500 a day.'"

Remember that... Everyone loves a good testimonial, but it's smart to be wary of them. The story may or may not be true. And it's highly unlikely that the testimonial reflects the actual experiences of other people using the system or advisory service - or the result you're hoping for.

The Regulatory Trade-off - Spread Betting

Financial regulation is a constant balancing act. On the one hand, the authorities have a duty to protect investors and to safeguard the financial system. On the other hand, they have to allow firms enough freedom to compete and carry out their business. It's always difficult to get that balance quite right.

To take a critical point of view, there's no denying that the current robust regulatory regime comes at a price. The absurdity of a risk disclosure notice is a fairly trivial observation. A more substantial point is that demanding capital requirements and other such restrictions impose costs on the spread firms, and these costs, inevitably, get passed on the consumer.

Moreover, heavy-handed regulation runs the risk of stifling or suppressing competition. Erecting artificial barriers around an industry may well screen out the unfit and the improper, but it may also deter reputable businesses, which might otherwise broaden customer choice and challenge the established firms in the industry.

Ultimately, though the primary aim of regulation is to protect the investor, and the current system achieves this very effectively. The spread firms are obliged to conduct their businesses and advertise their services in a responsible way. Everyone who spread bets is made abundantly aware of the potential for loss. There is a strong, independent complaints procedure - above all, if are fortunate enough to be owed money by a spread firm, up to £50, 000 it's almost as safe as having it in the bank.

What to do if you have a Complaint

If you have a legitimate complaint against your spread betting broker and it is unwilling to accept any responsibility to resolve your compliant fairly your next step would be to escalate your complaint in turn to the Financial Ombudsman...FCA...Trading Standards. If then your spread betting broker tries to shirk responsibility or claims that the customer agreement absolves it, the next step would be to name and shame them, go to a few papers or share magazines and places like this site...and never let go of it.

The problem is some spead betting companies get away with it, because people cannot be bothered to put a complaint in. "Well, guys change your way of thinking" if you have an issue, take it on. The more who do this, the better place it will be for us traders.

Another sticky issue is the regulatory side and MiFID (Markets in Financial Instruments Directive) which has now moved from a passive situation and is good from an investor point of view. It is now not enough for a spread betting or CFD provider to rely on a risk warning. The onus is now on the institution to not only explain what this risk is to the investor but also to be able to demonstrate that they've actually gone through that whole process.