A bet that backfired

Regulators have announced a possible ban on the riskiest products, sending the sector’s shares into free fall. Ben Judge reports.


"Idiots with cash to burn": please do apply
(Image credit: serpeblu)

Regulators have announced a possible ban on the riskiest products, sending the sector's shares into free fall. Ben Judge reports.

Shares in IG Group, CMC Markets and Plus500 slumped by up to a fifth this week. Blame "an early Christmas present nobody in the City's booming spread-betting industry wanted", says Ian King on Sky News.

The European Securities and Markets Authority (Esma) announced it was considering banning the sale of "binary options", which allow speculators to bet on whether a security or a market will rise or fall in a certain timeframe sometimes as short as 30 seconds.

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Binary bets are not an important product for spreadbetters, but there will also be a clampdown on one of their main offerings, contracts for difference (CFDs). These allow you to make leveraged bets on the ups and downs of a wide range of financial assets. Esma said it would carry out "a brief public consultation" in January on the measures, which go further than those previously proposed by the UK's Financial Conduct Authority.

"There are limits to how far regulators are obliged to save individuals from their own stupidity," says Nils Pratley in The Guardian, "but binary options represent a clear case for intervention." It's basically a bet on a coin toss. Companies have enticed gullible punters by letting them think they can "trade like a City professional".It's a "sham" and there is no way this product is suitable for retail investors.

Online brokers trading in binary options have been "engaged in a business model best understood as trawling the internet for idiots with cash to burn", agrees Lex in the Financial Times. Punters sign up, "lose money and move on".

As for CFDs, says Alistair Osborne in The Times, wagers can come with leverage of 200:1 or more: in other words, you need only put up 0.5%, or less, of your notional exposure. This kind of leverage explains why 82% of retail punters lose money around £2,200 typically. Esma is now suggesting limiting leverage to between 5:1 and 30:1, depending on the volatility of the underlying asset.

The CFD industry may now insist that "restrictions will drive traders offshore", says Lex in the Financial Times. "No dice. Having spent millions to encourage the world's football fans to play with dangerous financial instruments", they cannot complain "when a referee shows up at last".

The industry could have pre-empted a "painful drop in [CFD] volumes", says Alistair Osborne, if it had put its own measures in place to protect punters from bets they don't understand. "The latest case in point?" Bitcoin CFDs.

Unilever gets a tasty price

US private-equity group KKR is to buy Unilever's spreads business for €6.8bn in a deal that marks the "end of an era", say Scheherazade Daneshkhu, Javier Espinoza and Arash Massoudi in the Financial Times. The sale is the result of an overhaul of the business promised by chief executive Paul Polman in the wake of Kraft Heinz's aborted £115bn takeover in February. But it waves goodbye to one of Unilever's roots. The global consumer-goods giant was created out of the modest merger of Dutch firm Margarine Unie and the UK's Lever Brothers, way back in 1932.

In betting on spreads, KKR is taking a gamble. While it hopes to "highlight the health benefits of margarine to consumers", says the Financial Times, "sales have been contracting over many years as consumers switch to more natural foods". The deal will certainly need "some full-fat ingredients to generate a decent return", agree Chris Hughes and Andrea Felsted on Bloomberg Gadfly. And Unilever's shareholders shouldn't grumble.

The "backdrop for the sale could hardly have been better". A bidding war between KKR and rivals CVC Capital Partners and Apollo Global Management "created a tense auction". At nine times earnings, the deal is "a little less than the average multiple of 10.9 in similar deals" and "far less" than the 20 times McCormick paid for Reckitt Benckiser's food business. But "given the unappetising prospects for spreads, it's no surprise records aren't being set".

City talk

Four Seasons Health Care, Britain's largest operator of care homes, in difficulty for many reasons, says Nils Pratley in The Guardian. Fees are under pressure; overheads are up; and Brexit "complicates staffing requirements". But the key is too much debt. Terra Firma, the private-equity firm run by Guy Hands, "overpaid for the business in 2012 and loaded it up with leverage". Of the £825m it paid, £500m was borrowed.

Now Terra Firma has fallen behind on its "punishing" interest payments. US hedge fund H/2 Capital Partners, which bought most of the debt, will "probably clean up" because "with a gentler debt structure, Four Seasons is a good business". The rest of us can only shake our heads. "It's a shocking way to fund provision of care homes for the elderly."

Michael O'Leary has long rejected Ryanair pilots' calls for unionisation, says Kate Burgess in the Financial Times. But with pilots threatening to strike unless their union was recognised, he's shifted his stance to "ingratiation". Shareholders were unimpressed, with €1.5bn wiped off the airline's market value, but O'Leary has made the right decision. Ryanair's cock up over pilot rostering has "taught [him] the price of a PR disaster". Keeping his passengers happy is worth more to the airline than €1.5bn. "If unionisation is the price of a smooth take-off and landing, it is a toll that is worth paying."

South Africa's Steinhoff, which owns of UK retailer Poundland, has discovered "accounting irregularities" that prompted an 80% slide in its share price. That's bad news for eight global banks who lent Steinhoff's boss Christo Wiese €1.6bn secured by €3.2bn of Steinhoff shares, says the FT's Brooke Masters. Those shares are now worth less than €400m. "Bankers and investors should be asking whether there are any other executives whose lifestyles and investments [depend] on share-backed loans."

Ben Judge

Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.

Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.