Let’s assume the worst case scenario and a spread betting provider were to go into liquidation and there was a shortfall of client assets as happened with MF Global?
By law providers are obliged to hold all retail client funds (that’s you and me) separate from company funds – unless they are breaking the rules which opens them to criminal proceedings.
But I’ve asked this question to some of the big powers:
Ayondo: Ayondo is authorised and regulated by the FCA. This means that retail client funds are automatically protected by the FCA’s investor compensation programme at Ayondo. We also ensure further protection by having all funds ring-fenced and held in client segregated accounts. All client monies as such are held separately from Ayondo funds. Retail client deposits aren’t utilised for the company’s hedging mechanisms, so clients can be safe in the knowledge that when the remit money with Ayondo, they will get it back, plus more if they make a profit!
But isn’t segregation of funds ultimately controlled by the spread betting company? Look at what happened at WorldSpreads…
WorldSpreads was a spread betting company that went bust and was breaching Financial Conduct Authority rules, which clearly require that all client monies must be kept in segregated accounts.
The real failures here are the FSA (now the Financial Conduct Authority) and the auditors because it clearly seems that something extremely dodgy went on here. Why the government and the City generally is not falling over itself to find those who may have perpetrated any fraud and not jailed the effing low lives yet is scandalous. At least the FCA was quick to move to compensate most retail investors in this episode.
If I lose money because of my buying and selling activities in various stocks and other financial instruments, then I live and die by my decisions. But to have my money pilfered away when I am reassured that the money is sitting safe in a segregated bank account, supposedly checked by the auditors and the FCA, is as bad as any bank going down with my savings. These firms have been ‘vouched’ for by the regulator for god’s sake.
IG: We segregate retail client money so that it’s kept entirely separate from our own money, as per Financial Conduct Authority (FCA) rules. This means that if we were to default, retail client funds would be returned directly, rather than be treated as a recoverable asset by creditors. Furthermore, we go beyond the FCA’s requirements and segregate the funds of individual professional clients too.
ETX Capital: Further to your earlier communication, the FCA has strict rules covering our conduct of business and financial adequacy.
- Each FCA regulated firm, including ETX Capital, are required to carry out daily Financial Resource calculations to ensure the firm has adequate regulatory capital at all times.
- Segregation of client funds involves the firm placing Retail client funds (and those professional clients who we agree to segregate) in a client money account separate from the firm’s own money. In the event of default by the firm, segregated funds are held for our clients and debts of the firm cannot be paid with those funds. Similarly, should the firm’s bank account become overdrawn, the bank cannot use client funds to reduce the overdraft. Please note that for those classified as Professional clients, the above does not apply and they risk becoming an unsecured creditor of the firm. Note: segregation of client money from the firm’s money does not protect the client if the bank that holds the client money bank account goes into administration.
- By the end of each business day we rebalance our segregated funds accounts to ensure that the liquidation value of each client’s account, as at midnight that day, is fully segregated.
- Compensation scheme – In the unlikely event the firm was to go into liquidation AND there was to be deficiency in the client money bank account, individual clients are covered by the Financial Services Compensation Scheme (FSCS). The maximum FSCS payout per client if the firm goes into administration is £50,000.
This is what the KPMG; the administrators had to say regarding WorldSpreads -:
To the extent that it is not possible to reclaim money, it may be possible to make a claim under the Financial Services Compensation Scheme (‘FSCS’). FSCS is a compensation fund of last resort for customers of authorised financial services firms who become insolvent (such as the Company). For eligible investment claims where the consumer suffers a loss, FSCS can pay up to £50,000 in compensation per person, per authorised firm. If claims are paid by FSCS, it will then assume those client positions against the Company.
So if you have money stuck at WorldSpreads you will probably get a payout from WorldSpreads and then a second payout from the FSCS. In practice this means that if you have an amount in excess of £50,000 with an FCA certified provider, you are eligible to claim £50,000 in full from the FSCS and you then join the list of creditors for the balance. My personal take on WorldSpreads is that their business strategy was fundamentally flawed – on the one hand they offered zero spreads on some of their most popular markets meaning the company could make money only by taking the other side of clients’ bets – which is basically the traditional bookie’s model. In a prolonged market rally like the one we have experienced in the first few months of 2012 – a provider with large unhedged exposure is likely to suffer.
Certainly how your broker processes and handles your positions will have a heavy impact on risk and performance. Good spread betting providers hedge large exposures to their clients’ bets by taking offsetting positions in the underlying market while making their money from the spread between the prices paid by clients to buy and sell a position. This is why you should run a mile if a provider offer zero spreads. Also if a broker doesn’t widen their fx spreads during volatile events while still filling client orders this would have indications over hedging policy as the clearing banks the quotes are amalgated from will definitely have widened theirs or pulled them altogether. Re-quotes are an example here. A broker may requote heavily as they are want to match their amalgamated FX feeds for hedging (a clue is sometimes when their quotes widen rather than remain fixed) or that they may be focusing less on overall flow and more on individual account activity, the latter not really being good for the client unless they are regular losers. In addition the larger the flow a broker has the more stable their prices as they rely less on skewing in order to balance their exposure.
Whether a broker has their own tech can have an impact. Few have the capital to build and maintain platforms and sometimes this is due to owners not reinvesting money but taking it out. Pushing clients to elect up their FCA category would also be a concern. Other important facts would be the transparency of who the owners were and where they are based.
Unfortunately it would be next to impossible for a client to know the spread of other clients but I am always wary of providers which run cosy hospitality events for big clients. Big clients are a default risk, tend to make staff focus on them and not the average client etc etc.
In any case the major thing it depends on is that the company you do business with is actually regulated by the Financial Conduct Authority or has a passport to operate in the UK (Mifid). Most spread betting providers are British so they are regulated by the FCA and are thus obliged to segregate client funds. However, there are some companies outside the UK that offer similar products permitting UK speculators to deal in forex or CFDs. These are controlled by their local financial regulator and don’t come under FCA jurisdiction. So trading with a company based out in Cyprus would not be covered (by the FSCS) – so stick to the companies based and regulated in England.
Important: An essential check for any prospective client considering a provider should be to ensure the broker is registered with the Financial Conduct authority (FCA). About Cyprus registered brokers. There are specific reasons why these companies register themselves in such jurisdiction and it’s not for the weather. Your money is at risk with all of these offshore brokers. Stick to UK regulated brokerage houses, at least if they steal your money you will have some access to compensation.
Note: As for counterparty risk one has to consider that this comes in several flavours since the segregation of client money from a firm’s money does not protect the client if the bank that holds the client money goes into administration. In which case we have:
- The risk of the spread betting company going bust (god forbid!) – in which case the maximum recovery per the FSCS is £50,000 (worst case scenario -> WorldSpreads isn’t even the worst case scenario since the company had a considerable amount of cash that will be disbursed to clients).
- The risk of the bank at which the spread betting providers holds clients segregated funds going bust (again, hopefully never!!) – maximum recovery £85,000 (worst case scenario).
It’s important for a trader to manage their risk as a priority but they cannot also manage their broker’s risk so it is worth learning as much as possible about how they function so as to best try to mitigate slippage, requotes, misquotes, 3rd party or primary tech issues and at worst default.
- Companies based in the EU. At least ensure that your broker is not based in some dubious tax haven jurisdiction, and in the case of financial insolvency, there is a reasonable chance to compensation.
- Separation of customer and corporate funds. Brokers that do not meet this minimum requirement should be avoided.
- Sheer size. Providers that are in the market for many years and have a customer base of several thousand customers are generally less vulnerable than for newcomers.
- Customer satisfaction. It cannot hurt to research your broker in internet forums!
Here are some important lessons to be learnt of the WorldSpreads fiasco:
(1) Never trade with money that you simply cannot afford to lose. This is also known as the ‘The Golden Rule’.
(2) If administrators takeover to oversee affairs, then you’ll find quickly enough that retail clients are not normally ‘preferred creditors’ – so your chances of getting any money back, once positions are frozen, will almost be guaranteed to be a fantastically protracted/time testing process… AKA the: “why are we waiting, why are we waiting, why are weee way…ay…ting? etc” Rule :-/
Nonetheless, (3) if you happen to be spreadbetting with sizeable sums of money, then ‘twould be wise to ensure that your wherewithal is indeed ‘spread’ around several time trusted and properly regulated bodies. AKA ‘the nay keep ye grandma’s eggs in ye one thatched basket” rule
While I’m at it, there is also (4): avoid any offshore entities which just happen to be regulated by any non-UK ‘gaming commissions’, unless you enjoy worrying whether your money is safe). AKA the “I like to sleep at night” rule.
(5) As long as you’re using a properly regulated (i.e., FCA) SB firm, then it would be prudent both to ensure too that your funds are always held in a segregated account, and importantly that your chosen SB companies are all (without exception) covered by the usual FSCS compensation scheme for the first £50 K. AKA the” keep your preferred papers in a place that’s just so safe – that even them great powers above us would gladly indemnify its safety, at least to a very large extent and then beyond which, you’re on your own” rule.
Should one follow the above course of action at all times, then this subject really shouldn’t be something to which anyone who is a retail client of any ‘proper’ SB firm (…likely the vast majority of us) should be worrying about! AKA the “don’t worry, be happy. every little tings gonna be alright” rule.
Again, it cannot be stressed enough that to place your money with any firm that is not covered by the FSCS scheme, is foolhardy in the extreme. Such really cannot be stressed enough: if you still entertain any ‘regulatory doubts’, then you should check both with the firm itself *and* also with said UK authority. AKA the “this rule is certainly one worth following, nevertheless if all them other rules above don’t make sense, then it’s unlikely this one will either” rule. But it should!
And BTW, the rest is up to you 😉
Editor comment: Do you feel comfortable having all your $$$ into one broker or do you use multiple as risk mitigation? For me the answer is simple… Do I trust my broker? No Way. I’m a victim of a Broking House gone bad, so I know only too well. I have funds with four different broking houses now, because when things get hard in the future, there’s going to be a clean out of the weaker hands. It’s like that old saying – “Return of Capital is better than Return on Capital”
Regarding being segregated, it is important to be classified as such as they get their money before non-segregated clients. This means that in worst case scenarios accounts having less than 50k will be fine and will be reimbursed in full by the FSCS. In any case it is good practice to have multiple spread betting accounts to spread the risk.