Memorandum from Sporting Index (DGB 24)
1. INTRODUCTION
1.1 This submission is in response to the
Joint Committee's request for further information as part of its
enquiries into the draft Gambling Bill.
1.2 Sporting Index was founded in 1992 and,
even though there is little in the way of published data about
the sports spread betting industry, it is unanimously recognised
as being the market leader in sports spread betting with an estimated
sixty per cent share of the market. There are currently three
other UK based spread betting firms and it is believed that another
one will launch into the market soon. It is, however, the only
business to focus solely on sports; the others, and indeed the
industry, derive the majority of their revenue from financial
spread betting.
2. WHAT IS
SPREAD BETTING?
2.1 Spread betting is currently defined
under the Financial Services and Markets Act 2000 as a contract
for difference that is a gaming contract. It therefore differs
fundamentally from a fixed odds bet in that the ultimate outcome
for the client can fluctuate very widely in value with the upside
or downside often not being known to the client at the outset.
With spread betting a client only nominates a unit stake, for
example so many pounds per goals or per run, often without limiting
his financial exposure. This is a particular feature of a contract
for difference which is a type of derivative product.
2.2 With fixed odds betting, if a client
places a sum of money on a horse, the stake is all that can be
lost. Consequently, the risk profile is very different from spread
betting where the potential for unlimited losses requires a much
greater degree of regulation than fixed odds betting. The clients
tend to differ in profile from the traditional fixed odds clients.
3. HISTORY OF
REGULATION
3.1 Spread betting firms have been regulated
for over 15 years, in the first instance by the Securities and
Futures Authority (formerly the Association of Futures Brokers
and Dealers), until it merged with the Securities Association
to form the Securities and Futures Authority in 1992. Since December
2001 the firms have been regulated by its successor, the Financial
Services Authority ("FSA").
3.2 Any firm that wishes to undertake spread
betting in the UK has to be authorised by the FSA prior to setting
up in business. The authorisation process is extremely thorough
and can take several months. The FSA aim to ensure that the firm
and its key staff are fit and proper, that there is sufficient
capital to support the business and that there are adequate, documented,
controls in place. All client funds are segregated, capital adequacy
controls are imposed and rigorous "know your client"
and anti-money laundering controls required to be followed.
3.3 As a result of the extensive cooperation
between Sporting Index and the FSA over the last 11 years, the
regulators have an extensive knowledge of sports spread betting,
Sporting Index and the rest of the participants in the industry.
The FSA has been involved with all aspects of Sporting Index's
business and is able to both regulate and advise in equal measure.
4. THE FSA AND
THE SPREAD
BETTING INDUSTRY
4.1 The FSA is there to maintain confidence
in the spread betting industry, promote public understanding of
it, ensure that clients are given an appropriate degree of protection
and reduce the scope for financial crime. It has developed a detailed
regulatory framework to ensure that these objectives are met.
In doing so its staff have built up considerable experience and
understanding of the industry and the FSA has been a vital factor
in ensuring that the firms which currently exist are scrupulous
in assessing clients' credit worthiness and are responsible in
their marketing of spread betting to prospective clients. All
Sporting Index's published literature and advertisements carry
appropriate risk warnings.
4.2 Broadly speaking, Sporting Index complies
with the FSA's standard rules in respect of financial spread bets
in the same way as other similar regulated firms are required
to do so. There are no rules written specifically for Sporting
Index as its products are identical to other financial derivative
products, even though the underlying market differs. This is in
much the same way as similar products are traded on markets as
diverse as the FTSE 100, gold, pork bellies or the retail house
prices index.
4.3 Sporting Index reports financial information
to the FSA on a monthly basis and is subject to regular inspection
by them. It has a separate Compliance Department with a nominated
Compliance Officer and Money Laundering Reporting Officer to ensure
that appropriate standards of regulatory compliance are adhered
to within the commercial environment which the company operates.
4.4 Moreover, unlike fixed odds betting
businesses, Sporting Index is unable to accept everyone as a client
even if they have the financial wherewithal to spread bet. The
verification procedures are stringent and off-putting in a practical
and commercial sense to prospective clients.
5. SPECIFIC RECOMMENDATIONS
IN RELATION
TO DRAFT
POLICY FOR
REFORM
5.1 It is clear that any new regulator,
such as the Gambling Commission, would have to spend a great deal
of time acquainting itself with not only Sporting Index and the
sports spread betting industry, but also the complex nuances of
trading derivative products. Spread trading is a niche area which
requires monitoring by many different departments within the FSA.
Given the complexities already involved for the Gaming Board in
its evolution to the nascent Gambling Commission, we consider
that adding the regulation of derivatives to their workload may
create confusion and undermine one of the Gambling Bill's central
objectives: that is, to protect the consumer. It could certainly
lessen the protection afforded to the public if regulation was
not stringently applied, but damage the industry irrevocably if
that application is too zealous.
5.2 Sporting Index fervently believes that
the different risk profile of its products, as well as the specialist
market place in which it operates, differentiates it from all
other forms of betting and endorses DCMS's current intention in
the Gambling Bill to confine spread betting to separate regulation.
Whilst the cost to Sporting Index of complying with FSA regulation
is substantial, it is a price worth paying to protect the industry's
integrity and the customer.
5.3 Spread trading is not gambling; it is
a derivative product based around a market which just so happens
to be sport. It can therefore safely exist as an online complementary
product in gambling/gaming venues as well as non-gambling/gaming
venues just the same as other online products and provided it
is underpinned by the comprehensive regulation of the FSA, its
supply should not be restricted by regulations applicable to gambling
products.
5.4 Sporting Index remains concerned however
that products similar to spread trading are "disguised"
as fixed odds products by simply disaggregating the end result
as a fixed odds price. In situations such as these (eg range betting)
the FSA has no control and the clients are left extremely vulnerable
without either regulations to fall back on or, currently, the
force of law. If Sporting Index is to accept the financial and
regulatory burdens associated with maintaining market order, these
imitation products should be brought within the remit of the FSA.
Failure to do so will prejudice client protection and undermine
the industry, Therefore Sporting Index would suggest that although
the Gambling Bill has excluded the definition of a fixed odds
bet, it should be explicit that products such as range betting
be brought under the provisions of the FSA regulation.
5.5 Moreover, Sporting Index is also subject
to stringent FSA advertising regulations. Once again, these are
designed to warn the unsuspecting of the nature of the product
on offer. Sporting Index finds that these are a deterrent to attracting
new business but acknowledges their value and welcomes the protection
afforded to clients. Products such as range betting should not
escape such regulation, thereby allowing suppliers to lure unsuspecting
and vulnerable users into use of products which are more volatile
than the customer is led to believe.
5.6 The FSA has extensive knowledge and
experience of supervising Sporting Index's capital adequacy, credit
management and, most important, protecting its clients. Sporting
Index fully endorses the DCMS's current view that the regulation
of spread betting should be outwith the scope of the Gambling
Bill. Moreover, whilst the DCMS has made it clear that this is
subject to review, any re-evaluation of this should be deferred
for, say, five years to allow the Gambling Commission time to
bed down before embarking on reviewing this extremely complex
area. Any review would necessarily need to examine spread betting
in general (ie both financial and sport) and determine an overall
policy for this product set, as well as the individual markets
(eg sport or financials) which utilise the product.
CONCLUSION
Spread trading is a derivative product. Although
it is founded upon sports markets, these markets are in many ways
the most transparent and verifiable markets available. Results
and performances are available for all to see and integrity is
key to their future success. Risks and rewards are high in spread
trading and the nature of the users sophisticated. The FSA appears
to Sporting Index to remain the most logical regulatory environment.
Spread trading can be a complementary product to other gambling
and gaming products, although the client base is normally different.
Sporting Index agrees with the DCMS that the gambling de-regulation
should not undermine market growth further by dual regulation
or by subjecting spread betting to any regulation that applies
to gambling products; it would be the same as trying to make betting
and gaming operators subject to FSA regulation. However, regulation
must prevent hybrid products from exploiting loopholes that currently
exist.
Finally, Sporting Index would suggest that a
review of the FSA status as regulator of both financial and sports
spread trading not take place until five years after the Gambling
Commission has been incorporated and begun its considerable obligations
under the Gambling Bill.
December 2003
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