- Created on Saturday, 17 March 2012 09:07
The recent announcement by WorldSpreads to suspend share trading as "possible finanicial irregularities" are investigated, has left clients concerned about the recoverability of their deposits held with the company. Whilst we cannot speaks on behalf of either the FSA or the FSCS, below are some of the facts we've extracted from their websites to help shed some light.
Your spread betting account consists of 2 components: your deposit, and your trading positions:
Recoverability of your deposit
- The company is publicly listed on the London based Alternative Investment Market (AIM) and the Dublin based Enterprise Securities Market (ESM) and is regulated in the United Kingdom by the Financial Services Authority (‘FSA’).
- Although the WorldSpreads group has branches globally, WorldSpreads Limited, the main trading subsidiary of WorldSpreads, is authorised and regulated in the UK by the Financial Services Authority (‘FSA’). The Group has a subsidiary in South Africa, which is regulated by the South African Financial Services Board (‘FSB’).
- The FSA has strict rules covering spread betting providers' conduct of business and financial adequacy designed to protect the consumer. Of particular relevance in this case is the segregation of client funds.
- Segregation of client funds requires companies to place client funds in a separate bank account to the firm's own money. Essentially this means that in the event of default by a spread betting provider, the bank acknowledges that there is no right of offset between the firm's funds and the clients.
- If the company is guilty of failing to comply with segregation of client funds, and these funds have been used by the company for other purposes, then the consequences for the firm are severe. The protection offered to clients under these circumstances is less clear, however if bankruptcy follows, the outcome could be a discounted payout from the firm's administrators.
- Deposits made by private individuals and small businesses to any authorised firms are also protected by the FSCS. From 31 December 2010, the deposit compensation limit is £85,000. This compensation is normally only relevant if the bank with whom the spread betting deposits client money fails.
Recoverability of (in the money) Trading positions
- In the event that a spread betting company goes into liquidation, individual clients should also covered by the Financial Services Compensation Scheme (FSCS).
- The FSCS provides protection if an authorised investment firm is unable to pay claims against it. For example:
> for loss arising from bad investment advice, poor investment management or misrepresentation;
> when an authorised investment firm goes out of business and cannot return investments or money.
Investments covered include: stocks and shares; unit trusts; futures and options; personal pension plans and long-term investments such as mortgage endowments.
- The maximum level of compensation for claims against firms declared in defaulton or after 1 January 2010 is £50,000 per person per firm.
There is more info on the FSCS site, the MF Global Q&As provide some useful insight.