The WorldSpreads Collapse: the Moral of the Story
Finance (Photo credit: Tax Credits)
Shortly after midday on March 16 of this year, trading in shares of the once widely respected financial spread betting company, WorldSpreads, was suspended. The company collapsed, being unable to pay £14 million of debt to its 15,000 customers. “Accounting irregularities” had been discovered, which are the result of either negligence or fraud. It was MF Global UK all over again, but on a smaller scale. There are lessons to be learned by anyone who is tempted to open an account by the numerous spread betting offers of providers. It is not unknown for traders to be left with six-figure losses because the company they used went under.
The first lesson is that a spread betting company should be regulated by the Financial Services Authority (FSA), well-capitalised and free of debt. The accounts of such companies as IG Group and Cantor Index are available online. It is worth checking out any company to which you give your hard-earned money.
Whether you are considered a “retail” client or a “professional” client, you will receive protection from the Financial Services Compensation Scheme. If your account is not huge, you should be regarded as “retail,” but it is worth checking.
While consolidation makes your life easier, dividing your money between trading accounts will give you some protection from the failure of one company, and also allows you to compare prices and services. It may be worthwhile to use a discount company to bet on tight spreads, but a premium company for less liquid stocks where commission will be higher but prices will be better. WorldSpreads is all the proof you need that you should not put all your eggs in one basket.
It is better to disdain spread betting companies that offer credit facilities, as these put the company at additional risk.
You should know who is ultimately providing a service. WorldSpreads ran operations for eleven other companies such as Ladbrokes Financial Spreads, TwoWaySpreads and Victor Chandler Financials, so anyone who had an account with these would have been indirectly trading with WorldSpreads. Ladbrokes said that client funds were guaranteed.
Losses of up to £50,000 are covered by the Financial Services Compensation Scheme (FSCS), which is funded by fees paid by companies regulated by the FSA. Few traders would have accounts so large, but some do. The Scheme is struggling. Its new chairman, Lawrence Churchill, said that the massive increase in compensation paid by the Scheme represented “significant challenges.”
Category: Business
