Strangely enough, the spread betting industry is governed principally by the financial services regulator, not the Gambling Commission and the FSA has recently reviewed promotions for these services and found them wanting in various respects. Jonathan Mayner reports.
Topic: Betting and gaming
Who: Financial Services Authority
When: September 2009
Where: United Kingdom
Law stated as at: 19 October 2009
What happened:
In September 2009, the Financial Services Authority ("FSA") published a "Thematic Communication" on spread betting promotions. This followed a review conducted to assess the level of compliance with its rules and guidance on the part of industry participants who offer and promote spread betting services.
What is spread betting?
Spread betting encompasses various types of wagering on the outcome of an event, where the return is based on the accuracy of the wager. A spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread.
While such betting does take place in relation to the outcome of sporting events, the biggest market for spread betting activities in the UK concerns financial instruments. As a result, this activity is perhaps surprisingly regulated not by the Gambling Commission but by the Financial Services Authority.
An investor may for example place a wager on the range of fluctuation in the price of specified listed shares. Spread betting can be useful for investors in a volatile market as it can allow them to hedge against losses in a portfolio. As an investment activity it does however carry a high level of risk, with potential losses and gains far in excess of the original money wagered.
Scope and key issues
The FSA reviewed 17 websites and 59 other promotions issued by 12 firms.
In general the FSA considered that overall compliance was not satisfactory, and in particular that:
- risk warnings were inadequate;
- there was a lack of balance in representation of risks and rewards and in comparisons with other forms of investment;
- language employed was not always suitable to the target audience; and
- claims as to the tax-free status of spread betting activities may be misleading.
Inadequacy of risk warnings
The rule that financial promotions should be fair, clear and not misleading expressly provides that promotions for products or services which place a client's capital at risk should make this fact clear. The FSA encountered instances where this risk warning was absent or lacked prominence. The rules also state that information likely to be received by retail clients should not disguise, diminish or obscure important items, statements or warnings. An example of failure to comply with this rule would be where a risk warning is present but the potential client's perception of risk is diminished by nearby substantial claims of potential for large profits.
Unbalanced representation of risk versus reward
The FSA also found that, in contravention of the financial promotions rules, there was a tendency for promotions to emphasise the potential benefits of spread betting without also giving a fair and prominent indication of relevant risks. Proper compliance with this requirement for balance would require further warnings, for example as to the high risks associated with trading on margin where firms are highlighting the benefits of such activity.
Unbalanced comparisons with other investment options
Where promotions made comparisons between spread betting and alternative investment activities, some firms failed to present the comparison in a fair and balanced way. For example the relative merits of spread-betting compared to share trading may be highlighted, but only if balanced by disclosure of the relative disadvantages (such as that spread betting investors will not own the underlying shares and so will not benefit from ownership of an capital asset or receipt of income in the form of dividends).
Tax Status
Many promotions refer to spread betting as tax free. This is only true in so far as spread betting does not incur charges to Capital Gains Tax or Stamp Duty, however income tax may be payable if an investor relies solely on spread betting activities as their primary source of income. The financial promotions rules require that any promotions that refer to a particular tax treatment of must prominently state that tax treatment depends on the individual circumstances of the client and may be subject to change in the future.
Targeting and appropriateness
The FSA's review draws firms' attention to the fact that promotions must be presented in such a way as to be capable of being understood by the average member of the group the promotion is directed to, or which is likely to receive it. It was found that many promotions contained jargon and terminology that was unlikely to be easily understood by the target audience.
Substantiation of claims
The review also reminds firms that promotions that make use of superlatives (e.g. claims to have "the tightest spreads") should be capable of substantiation in order to be fair, clear and not misleading.
Why this matters:
The FSA believes that market volatility contributed to an increase of 60% in spread betting in the 12 months prior to April 2009. This timely review is important as it clarifies the FSA's stance on current practice in the promotion of spread betting activities which, in the current uncertain economic climate, are likely to remain popular with investors, sophisticated and otherwise.
While the FSA will be contacting and working with those firms who were found to be in breach of the financial promotions rules, the review is a warning shot across the bows of all firms and advertisers dealing with spread betting.
The FSA review contains a list of good and poor practices (set out below). Firms offering spread betting services and advertisers working for them must now take care to be aware of and emulate the FSA's examples of good practice in this area, while avoiding identified poor practices to ensure that they are complying with current FSA interpretation of the financial promotions rules.
Good practice
- Risk warnings that make it clear that not only could losses exceed the original investment, but that they could do so rapidly and substantially.
- Where a particular benefit of spread betting is promoted, any key disadvantages of that feature should also be disclosed.
- Pop-up risk warnings that have to be clicked through to access the rest of a website, supplemented with appropriate risk warnings through out the website.
- Promotions that make it clear that the investor would not own the underlying investment.
Poor practice
- Promotions without risk warnings, or where risk warnings fail to disclose that losses may exceed the original investment.
- Risk warnings whose impact is diminished by lack of prominence or proximity to references to substantial references to large profits or the ability to limit risk.
- Promotions which implied the investor's trade directly tracks the prices of the underlying investment, when in fact it tracks prices set internally.
- Wording implying that the investor would own the underlying investment.
- Promotions where comparisons with share trading lacked balance.
- Jargon used which was unlikely to be fully understood by the audience.
- Promotions describing availability of higher margin without explaining inherent risks.
- Promotions describing spread betting as 'tax free' without further explanation.
The FSA has stated that in the course of its review it encountered very few firms where there was no room for improvement in the standard of promotions.
All firms operating in this sector are expected to review their compliance and ensure that they meet the FSA's requirements.