EU threatens increased regulation for spread betting firms

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Following recent concern regarding the rise of spread betting firms, the European Securities & Markets Authority (ESMA) issued an update on Friday announcing that it would be conducting a public consultation to research the risks associated with spread betting brokers.

Spread betting firms allow investors to place speculative bets as to whether the price of stocks will rise or fall over a given period. The practice remains controversial in some countries, as many categorise it as a form of online gambling.

The ESMA noted that some national governments, such as the UK, had taken it upon themselves to tighten restrictions against spread betting firms. Opening in January, the public consultation aims to inform the ESMA as to whether such measures need to be implemented across Europe. The move would be allowed under the ESMA’s “product intervention powers”.

According to the ESMA, the motivation behind the move is the supposed high risk of binary options for amateur speculators, who have the potential to lose large sums of money through spread betting.

The potential new measures include a blanket prohibition on the sale or marketing of binary options and CFDs. The ESMA is also considering additional restrictions for limiting leverage of CFD trades. The UK’s Financial Conduct Authority said it supported the ESMA over this issue, warning that the majority of people who choose to bet on binary options lose money.

Following the announcement, share prices of UK spread betting firms fell dramatically, with Plus500 falling by more than 17%.

In response to the news, the UK-listed spread betting firm IG Group, which controls 40% of the UK’s spread betting market, commented that the proposed new restrictions currently under review are “disproportionate and go beyond what is needed to protect consumers from poor outcomes associated with excessive leverage.” IG also warned that the unnecessary regulation could encourage people to trade CFDs with unregulated firms, that are based outside the EU and even riskier.

Some have also noted that the measures go far beyond that seen outside of Europe, with the binary betting industries in both the US and Japan facing far fewer restrictions, with apparently little detrimental impact to consumers.

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