How Spread Betting Is Regulated In The UK

Spread betting allows traders to make a potential profit whether markets are rising or falling. But like any financial product, spread betting needs oversight and regulation to protect consumers. In the United Kingdom (UK), this regulation comes from the Financial Conduct Authority (FCA).

In this beginner’s guide to spread betting, we will learn about the FCA and how it regulates spread betting. We will also tackle critical points, such as how spread betting is taxed, and compare it to other financial products. 

A brief history of spread betting in UK regulation

Spread betting emerged in the UK in the 1980s as a new form of financial speculation for individual traders. Before this, options and futures trading were limited to professional traders and institutions.

Spread betting allowed the general public to speculate on the price movements of shares, currencies, commodities and more without buying the underlying asset. It proved popular among thrill-seeking speculators looking to profit whether markets rose or fell.

In these early days, Spread Betting UK operated free from any regulation. Some saw it as a form of gambling rather than investing. There were no controls on how firms worked, marketed themselves or handled client money.

This changed with the Financial Services Act 1986, which gave oversight powers for spread betting to the Securities and Futures Authority (SFA) for the first time. The SFA could now set conduct rules, investigate firms’ operations, and take disciplinary action if they breached requirements.

While light touch, this represented the beginnings of regulation to protect consumers in areas like advertising standards and handling of client funds.

The subsequent major development was the Financial Services and Markets Act 2000. This dissolved the SFA and handed responsibility for spread betting UK regulation to the newly formed Financial Conduct Authority (FCA). This reflected the growing maturity of the industry.

Here’s an interesting read for you: What Is Leverage In Trading?

FCA rules and oversight for spread betting

The FCA requires spread betting companies to adhere to extensive conduct rules and standards to protect clients. Some key areas covered include:

Financial requirements

Companies must maintain adequate financial resources to cover the funds of their clients as well as potential risks that may arise in the market. Capital reserves act as a safety net against unexpected losses, providing a cushion for the company to fall back on during financial stress. 

Regularly reporting and auditing these resources ensures that the company’s finances remain in good health, allowing it to continue providing its services to clients without disruptions. This financial transparency and accountability level is crucial in building client trust and promoting a stable financial environment.

Transparent terms

All marketing efforts, promotions, and terms and conditions provided to clients should be transparent and easily understandable. This means the language should be straightforward so clients can make informed decisions about the product features, fees, risks and functioning. The terms and conditions should be easy to find and written in a language that is not misleading. This will enable clients to fully understand what they agree to and make decisions about their investments. 

Trading practices

Strict regulations are in place to prevent market manipulation, insider trading, and other dishonest practices. Furthermore, close monitoring is implemented to detect and discourage any misconduct. The aim is to create a field for all participants in the market, where everyone has a fair chance to succeed based on their skills and knowledge rather than their ability to engage in fraudulent behaviour.

Marketing content

Spread Betting UK is subject to strict advertising standards to prevent vulnerable groups from being pressured into taking excessive risks. Advertisements should be informative and educational rather than manipulative or exploitative. The focus of marketing content should be on empowering customers to make informed decisions and manage their risks effectively.

Margin rates

The leverage and margin rates offered are reviewed to balance risk versus accessibility for clients. Very high leverage can encourage irresponsible levels of speculation.

Client suitability

Firms must evaluate a client’s investment knowledge and experience before offering spread betting. This evaluation aims to determine if the client has a sufficient understanding of the product and its risks to prevent them from investing in unsuitable products that could lead to significant financial losses. 

Client complaints

Spread betting platforms should have a transparent and efficient system in place that allows customers to voice their grievances and register complaints. Such a system should have a well-defined escalation process in case complaints remain unresolved. The involvement of an impartial authority like the Financial Ombudsman can provide a fair and unbiased verdict, ensuring that customers have a recourse option for any unfair treatment. 

Client funds

It is a legal requirement for firms to keep client funds in segregated accounts separate from the company’s funds. This ensures that clients’ money is protected in the event of the company’s insolvency. 

This extensive oversight addresses the diverse risks in spread betting, making it a more trustworthy and suitable activity for the average consumer.

This article may pique your interest: What Are Futures In Trading? 

Recent changes to spread betting UK regulation

The FCA regularly evaluates and updates its regulatory framework. In recent years, the organisation has implemented more rigorous standards to protect consumers and prevent fraudulent activities.

For example, in 2020, new rules tightened standards around bonus promotions and incentives offered to clients. There were concerns these were encouraging excessive risk-taking.

In 2022, the FCA implemented stronger guidelines around marketing. The aim is to avoid adverts that could pressure vulnerable consumers into spread-betting beyond their means.

There have also been some calls for the FCA to impose lower limits on leverage and margin rates offered to retail clients. High leverage amplifies both gains and losses, increasing risk. But for now, leverage limits remain unchanged.

How spread betting profits are taxed?

One major appeal of spread betting is it offers tax advantages compared to other trading and investing activities. Unlike stocks, forex, and CFD trading, spread betting profits are exempt from the UK’s Capital Gains Tax. This is because, legally, it is classified as gambling, not investing.

If you traded shares and made a £10,000 profit by selling at a higher price, you would need to pay Capital Gains Tax on that amount. But if you made £10,000 profit on a spread bet predicting that the share price would go up, you pay no Capital Gains Tax.

However, while profits are tax-free for the client, spread betting firms must pay tax. They must pay VAT on their earnings and commissions. And clients need to declare any profits on their annual tax returns, even though no tax is due.

How does spread betting differ from other financial products?

While spread betting shares similarities with other leveraged trading products, there are still some key differences to note:

Contract for Difference (CFD)

CFD trading allows similar speculation on financial markets going up or down. However, with CFDs, profits or losses are based on the difference between the opening and closing price of the asset. With spread betting, returns or losses are based on the difference between the opening and closing price multiplied by the size of your bet.

Options trading

Options trading is a type of financial derivative that gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on a specified future expiration date. Spread betting, on the other hand, is a type of financial betting that allows traders to speculate on the price movements of an underlying asset without actually owning it. Unlike options, spread bets have no fixed expiry and can be closed anytime.

You might also like to read: How To Trade CFDs: A Beginner’s Guide

Markets.com - A top spread betting UK platform

If you’re looking for a trusted, regulated platform for spread betting, Markets.com is an excellent choice. Here’s why:

1. With Markets.com, you can spread bets on thousands of financial instruments, including forex, shares, indices, commodities and more. The intuitive web and mobile apps make placing and monitoring your bets easy.
2. Our platform is authorised and regulated by five governing authorities, including the Financial Conduct Authority (FCA). This gives you confidence you are spread betting with a reputable, compliant firm that must follow strict standards.
3. Markets.com also provides educational resources to help you learn spread betting techniques safely. Experienced traders can benefit from tools like live charts, technical analysis and risk management features.

So, if you want to try spread betting with a trusted, FCA-regulated provider, Markets.com has the features and reliability you need. 

Place your first spread bet on markets.com

Spread betting is a risky trading option that requires aspiring bettors and traders to conduct thorough research to improve their knowledge about this type of trading. The more fundamental and advanced knowledge you have, the more likely you are to take probable returns.

At markets.com, we encourage everyone to take a step only when confident and skilled in spread betting. If you feel equipped for this financial journey, we invite you to join our community.

Become a member of markets.com and access a cutting-edge trading platform! 

When considering “CFDs and Spread Betting” for trading and price predictions, remember that trading CFDs and Spread Betting involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”