http://www.thisislondon.co.uk/markets/article-23948496-an-industry-spreading-itself-too-thin.do
All is well in the spread-betting industry. It's a happy tale of innovation and success, of a young(ish) industry built by clever people, making money and creating jobs out of an interesting idea. The City of London at its best. Officially.
In the background, at keep-your-voice-down lunches and in we-aren't-having-this-meeting meetings, chunterings grow.
At the heart of the disquiet are two relatively new changes: the Markets in Financial Instruments Directive (Mifid), an EU rule from 2007, and a more recent piece of regulation from the Financial Services Authority. Both have had the effect of tightening the law on how spread betters and providers of contracts for difference account for their own money versus their client's money.
In the old days, the firms would get their biggest clients to sign a disclaimer stating that they were professional investors. So the £10 million that Mike Ashley, for example, might have bet on HBOS shares was non-segregated. It formed part of the brokers' balance sheet, and they could use it to hedge the position. If the broker went bust, well, the client joined the queue of creditors.
So, the firms didn't need that much of a balance sheet to run enormous client positions. Everyone understood the risks involved - or at least they claimed they did.
Lately, the FSA is insisting that you just can't do this.
All "retail" business, even if it is placed by individual billionaires, must be segregated. That might not have mattered if the firms had bulked up in the boom years. They didn't.
Most of the spread-betting houses are privately owned. So in the good old days, the owners would take out many millions each year in pay for themselves. Now, all of a sudden, they are looking at tiny balance sheets that leave them not enough money to do any hedging against potentially massive liabilities if things go against them.
The rumour is that one big player has just taken a complete pounding on the oil price, leaving an already weak balance sheet very shaky. Banking covenants are due for renewal over the summer, goes the talk, and some banks - especially those which are now all-but state-owned - are finding it hard to justify a rollover.
The spread-betters are running much larger books than they find comfortable, and so daren't aggressively grow the business in the way they had envisaged. In theory they want more clients, but in practice that just leaves them less able to hedge.
Industry insiders say that some players are massively overstaffed, and locked into expensive tenancy agreements that they now can't afford.
Some of these firms, the word goes, are up for sale. Approaches have been made. And mergers that would at least cut costs are on the cards.
An alternative is for the FSA to relax its stance - it could decide that firms going under as a direct result of rules that were established to protect investors would look bad all round, and agree a compromise.
One get-out-of-jail card would be that the brokers get the clearing houses to segregate the money. That way, life can continue more or less as before.
Otherwise, something has to give. Overseas players are hovering and eyeing up a market they believe they could quickly dominate. The very biggest UK players are safe as houses, I should say.
Beyond that, critics say that the spread-betting industry has overreached itself and needs fresh blood in any case. A shake-out is looming.
