Spread Betting and the Law 3 www.spreadbettingschool.com Another area of worry is that the companies are going to be obliged to gauge the
Spread Betting and The Law Will This Affect YOU?
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Spread Betting and The Law – Will This Affect YOU? During 2007 the activity of Spread Betting companies, like every financial institution in the UK, will come under a new European Directive The Markets in Financial Instruments Directive (MIFID) It comes into effect on 1 November 2007, when it will replace the existing Investment Services Directive. This report deals only with its impact on Spread Betting or, more importantly, Spread Bettors. If you want full details of MIFID for other areas then I suggest that you visit the FSA’s website (www.fsa.gov.uk). There are important parts of the MIFID directive that may affect you. For the first time there is European legislation that covers “commodity derivatives, credit derivatives and financial contracts for differences”. (Which is basically everything that spreadbetting is) . So which parts of these rules and regulations affect you? The first, very importantly, is the question of ‘bestexecution’. At present, if you place a bet on a share price the bookmaker can (in effect) make his own price for the share. Under MIFID it looks like he will have to offer the best possible price. This implies that his spread for any item will be fixed and the price he offers will have to be directly related to the best price available in the underlying market. However, this is not yet set in stone. Unfortunately, the FSA, who will be responsible for the administration and enforcement of MIFID, shy away from actually telling anyone what the rules are. And, by that, I include the bookmakers. This is not new. I’ve worked for various spread betting companies who have asked the FSA for advice about aspects of their business. The FSA’s standard reply is – “We can’t tell you what to do. Do it and then we’ll look at it and tell you if it is OK!” Naturally, this doesn’t inspire confidence. However, for the majority of those who bet it is very likely that we will see the end of skewed spreads when markets are moving in a particular direction. It’s also likely that the spread on any market will remain fixed rather than mysteriously widening, as they quite often do.
Spread Betting and the Law
Another area of worry is that the companies are going to be obliged to gauge the appropriateness of a product for any particular customer. In other words if your bookmaker doesn’t think that you should bet on, say, currencies then the onus is on him to stop you. What will this mean in practice? Well, for a start the bookmakers are going to be very, very careful about their customers and what they will let them do. Because MIFID applies across Europe the bookies are setting up offices abroad as fast as they can – because the majority of EU countries are untapped marketplaces for them. As they will be bringing in lots of new business there they are not going to be worried about turning away a few bets here. And, as you will have noticed, the bookmaker has the final say in almost everything. The bottom line: It will be up to the customer to prove to the bookmaker that he is competent. Yes, in order to comply with the directive you have to prove that you know what you are doing when you place a bet. Although MIFID is building in safeguards to protect the unwary it is also imposing tough rules that may limit what you can invest in. There are to be three classifications of investor: retail, professional or eligible counterparties. Retail investors will receive the most protection from regulators because, in effect, the others are individuals or companies that are full time traders. The category of retail investor is almost certain to include you. Investors’ paperwork may also increase, as they may have to provide more information about themselves and prove that the provider is acting in their best interests. Bizarrely, because of the potential for large losses, the rules for spread betting will even apply to betting on sport! The FSA looked at the question of whether spread betting 'may be suitable' for the customer by examining the customer application websites of the spreadbetting firms in August 2006. Their findings (taken from the FSA’s website) are: “We think the assessment would, in most circumstances, need to cover at least the following areas: ·
the customer's understanding of spread betting and how it works;
Spread Betting and the Law
the customer's understanding of the risks involved;
the customer's appetite for risk; and
the customer's ability to afford losses, possibly exceeding his/her initial stake.”
I believe that you could demonstrate the last one by setting up a separate bank account into which you placed a capital sum to bet with. The others are more tricky. If you already have a spreadbetting account and you have used it then you will probably pass the MIFID requirement. If not, you are going to have to demonstrate that you have considered these items and that you understand what they mean. One way of doing so is to take a course that addresses these points. The Spread Betting School (www.spreadbettingschool.com) has a home study course with an optional end of course examination that appears to cover the MIFID requirements. Because this isn’t a ‘get rich quick’ course it has more credibility than many others. And it doesn’t contain some of the glaring errors that many of the courses and books currently on the market contain. I have had over 20 years experience with spread betting companies. I’ve worked for many of them both as an employee and a consultant. Indeed, I’ve run the ‘legal’ ruler of a couple of them to make sure that they are on the right side of the regulations. I’m pretty sure that the regulators aren’t going to take much notice of the in house courses that bookmakers run as proof of a punter’s ‘fitness’ either. Why? Basically, because most of them are designed to make the punter bet. It’s in the bookmaker’s interest to get you to bet – it’s how he makes money. He’s not going to be desperate to point out the downsides, is he? Why is this stuff important? Well, there is obviously a move by the EU to control all financial instruments. That’s fine. The protection of investors isn’t really that good at present. So that’s good too. But there are a couple of other things that you should think about. For example, what about Binary Bets? If your bookmaker offers binary bets (or any type of fixed odds type bet) then these are NOT controlled by MIFID – in the same way that they aren’t controlled by the FSA at present. However, they ARE controlled under the Gambling Act. (The Gambling Act is that piece of legislation that, amongst other things, was going to provide a supercasino!) However, a lot of protection for the punter is built in to the Gambling Act and, if you ever fancy reading it, you will see that the way has been left clear to
Spread Betting and the Law
convert Spread Betting to come under the Gambling Act. Why would they want to do that? Well, one reason is that spread betting on financial instruments is taxfree. CFDs, or Contracts for Differences to give them their full name, are the ‘professional’ version of spread bets. They are not taxfree. Obviously, the government aren’t going to let the spread betting fraternity get away with that for too long. In fact, the government are quite happy that MIFID will make it harder for people to spread bet because it may force some of them into trading CFDs instead (and, therefore, pay tax). Another reason is that there is a lot of spread betting on sport and that, ludicrously, comes under MIFID. Yes, they have even discussed and agreed that spread betting companies must offer best prices on sporting events. Now, ask yourself, who is going to decide what sporting best prices are? The lesson you should take away from all this is that, from November 2007, the playing field that was spread betting will have dramatically changed. You may have to justify yourself to your bookmaker and you may find yourself out on a limb. It is likely that your spread betting company will have to change its rules. Make sure that you ask them for a copy. Get a printed one – not an online version (which can so easily be changed). I’ll be making further updates to this report and disseminating other things about spread betting in a FREE emailed newsletter. You can get it and keep yourself up to date by going to www.spreadbettingschool.com/newsletter.html . Good luck.
Spread Betting and the Law