December 8, 2016 / 7:40 PM / 3 years ago

German watchdog joins European peers in clampdown on spread betting

FRANKFURT (Reuters) - Germany’s financial regulator on Thursday announced new rules to curb spreadbetting, becoming the latest European regulator to clamp down on the fast-growing industry in which most retail investors lose money.

Watchdog Bafin said it intends to ban the sale of one of the most popular financial betting products - known as a contract for difference (CFD) - to retail customers if the CFDs include a so-called additional payment obligation.

“In the case of CFDs with an additional payments obligation, the risk of loss for the investor is incalculable,” Bafin Chief Executive Director Elisabeth Roegele said.

“For consumer protection reasons, we cannot accept that,” she added.

The country’s financial watchdog had already announced plans for the ban this summer.

CFDs let investors bet on both the direction a share price, currency or other financial product will move, and the extent of the change in price, and there is no stamp duty.

The industry is regulated by European Union rules which have no caps on leverage. That means investors can take out bets that are far larger than their initial outlay, offering greater potential returns but also running the risk of huge losses.

An additional payment obligation forces investors to pay for losses that exceed the balance of their CFD accounts from their other assets, thereby transferring the risk to other market players.

Thursday’s move came after three UK-listed spread betting companies saw their share prices plunge by more than a third on Tuesday after Britain’s Financial Conduct Authority said it planned to bring in new rules for the sector.

IG Group (IGG.L), one the largest global providers of spread betting, has seen its share price slide around 37 percent this week.

IG said in a statement on Thursday it considered the German proposal to be in line with its recent introduction of special accounts that are meant to prevent clients from incurring losses in excess of the amount deposited in their account.

The company said it would meet Bafin representatives, who have allowed until January 20, 2017 for consultations on the new ban.

In recent months, several countries across Europe, namely France, Belgium, Poland and Malta, have moved to ban CFD trading and the Netherlands is considering a similar measure.

In the United States, over-the-counter CFD trading is prohibited for retail clients unless the investor has a minimum investment capital of $10 million (£8 million) and $5 million solely for hedging purposes in CFD trading.

Reporting by Tina Bellon; Editing by Alexandra Hudson

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