City watchdog warns on spread betting

Many consumers have no idea of how much money they can lose on spread betting and should be wary about getting involved, a City watchdog has warned.

It's true that if you're betting so much per point and there's an unlimited number of points, then you can lose many times the amount of points that you are betting

Stuart Wheeler
founder and chief executive
IG Index

Spread betting is "a risky activity", a Financial Services Authority director said.

"People don't understand how spread betting differs from ordinary betting, where if you put up a £10 bet the worst that can happen is that you lose that £10," the FSA's consumer director, Christine Farnish, told Radio 4's Today programme.

"With spread betting, you could lose an awful lot more than that."

'Stop loss'

Industry officials acknowledge that spread betting could be more risky than ordinary gambling.

The number of investors placing spread bets has doubled in the last year

Interactive Investment Trading

"It's true that if you're betting so much per point and there's an unlimited number of points, then you can lose many times the amount of points that you are betting," said Stuart Wheeler, founder and chief executive of spread betting firm IG Index.

"But we offer, - and a lot of people take advantage of it - the ability to put a complete limit on virtually anything you do with us," he added.

"It is not the case that people have to not sleep at night. They can sleep knowing perfectly well that they cannot lose more than a specific amount."

Other companies offer similar solutions.

"Place small stake trades with a guaranteed stop loss, on the world's key financial markets. Potential losses are limited, whilst your profits are unlimited," Interactive Investment Trading (IIT) says.

Booming market

Spread betting's popularity has rocketed in recent years, among ordinary people as well as within some professional investment communities.

The basic rules of spread betting:

For a typical football match, an agency may offer a spread on the total corners of 11-12.

This means that the agency predicts that 11 or 12 corners will be awarded during the match.

If you agree with the agency, then you should not bet.

You always buy at the top of the spread while you sell at the bottom.

Source: Sporting Index

"Considering how easy it is to place a trade and with the current tax advantages that go with it, the number of investors placing spread bets has doubled in the last year," according to ITT.

"Previously it was considered a City thing, designed for the young, rich and frivolous. Not any more. It's very simple and the high rewards that can go with it are proving very attractive to investors," IIT said.

Extensive possibilities

"It is a booming industry because it is a very good deal for the punter," said Mr Wheeler.

Spread betting explained:

If you believe that more than 12 corners will be awarded, then you can buy at 12 for say £20 a corner.

If 16 corners are awarded, you win £80 (16 minus 12, multiplied by £20).

If 10 corners are awarded you lose £40 (12 minus 10, multiplied by £20).

If you believe that fewer than 11 corners will be awarded then you could sell at 11 for £20 a corner.

If 16 corners are awarded, you lose £100.

If 10 corners are awarded, you win £20.

Source: Sporting Index

Spread betting enables the armchair sports fan to bet on practically any aspect of any sport.

"In sports, there's a huge variety to bet on. The more right you are, the more you win. The more wrong you are, the more you lose," Mr Wheeler said.

Alternatively, it is possible to speculate in the financial markets by making spread bets to profit from, for example, movements in the stock markets.

"On financials, there's no capital gains tax. You can deal in many things for 24 hours a day," Mr Wheeler continued, adding "and there is this gearing".

Risky gearing

The rising popularity of spread betting among ordinary people who might not understand how this "gearing" works has caused the FSA to sit up and take note.

It may be difficult for some people to realise that they can lose vast amounts of money even if their initial bet is small, and yet they may be seduced by the potentially massive rewards.

"I was told that in the England-Holland match the other night, you could have actually lost £700 from a bet as small as £10 if actually you got it completely wrong," said Ms Farnish.

"It is seductive because it is attractive. And if you are seduced, you'll hope that the experience will live up to expectations. And in the case of spread betting it certainly does," said Mr Wheeler.

Mr Wheeler also insisted that the punters were warned clearly about the possible risks.

"Any punter who wants to open an account with us is required, by law, to look at and read carefully, and sign that he has read, a risk disclosure statement which covers all the risk," said Mr Wheeler.

It is awkward to criticise the spread betting industry for any faults with this statement, given that it has been drafted by the FSA.

"Really, they've drafted the warning everyone gets," said Mr Wheeler.