All private investors who open spread bets are protected by the Investors Compensation Scheme. The Investor Compensation Scheme (ICS) is an important safety net for private investors engaging in spread betting in the UK. Established by the Financial Services Compensation Scheme (FSCS) under the Financial Services and Markets Act 1986, it provides protection for retail clients in case an authorized firm becomes insolvent. Here are some key points about how it works:
- Coverage: The scheme protects private investors who lose money due to a firm’s inability to meet its liabilities. It applies to firms authorized by the Financial Conduct Authority (FCA), including spread betting firms.
- Funded by Industry: The ICS is not government-backed but is funded through a levy paid by all firms, including spread betting providers, contributing to the fund.
- Compensation Limits:
- The FSCS provides protection up to £85,000 per person per broker if the broker fails and is unable to meet its financial obligations.
- Conditions: This protection is specifically for private clients and applies only to investment business-related debts, not general debts like plumbing or other non-investment related issues.
- Eligibility: To qualify for FSCS protection, your broker must be regulated by the Financial Conduct Authority (FCA). This applies to both UK and overseas investors as long as the broker is FCA-regulated.
- Claim Process: Compensation is not automatic; you must launch your claim if you want to receive protection under the FSCS. The scheme handles investment-related claims but does not cover losses due to market volatility.
- Resolution Timeline: The FSCS aims to resolve straightforward claims within 9 months.
- Reliability of Spread Firms: Spread betting firms are typically well-capitalized and conservatively managed. They have proven their resilience, such as during the 1987 market crash, and are unlikely to become insolvent. However, the ICS serves as a backup in the unlikely event that a firm does default.
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. This scheme is a critical safety net for investors, offering substantial protection in the unlikely event of broker insolvency, but it doesn’t cover risks like market-driven losses or trading risks.
This regulatory framework offers some reassurance to retail investors, ensuring that they are not left entirely exposed in the rare case that a spread betting firm faces financial difficulties. However, the scheme’s limits mean that only relatively small losses are likely to be compensated.
Complaints
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.
Having said that under ESMA’s regulations, spread betting, like other leveraged trading, have negative balance protection. This means that retail clients cannot lose more than their account balance, even if market movements are extreme. The rules limit how much leverage brokers can offer to retail clients, and the negative balance protection ensures that clients are not personally liable for losses exceeding their initial deposit.
Under the current EU and UK regulations (post-Brexit), negative balance protection ensures that retail clients are protected from owing more than their deposited funds. If you lose money in spread betting under ESMA rules, the maximum loss is limited to your account balance. You won’t be liable for any debt beyond this if you’re classified as a retail client.
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 £85,000 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 spread 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.
