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Will MiFID hurt Spreadbetting?

MiFID (or the Markets In Financial Instruments Directive) has been one of the most important developments in Financial Services in recent years, yet is has been dwarfed by other regulations such as BASEL 2 and Sarbanes Oxley, or SOX, regulations. Yet MiFID will have far-ranging implications in the UK finance industry, not least in Spreadbetting.

So what exactly is MiFID and how will it impact Spreadbetting? MiFID is a European Union legislation, part of the Financial Services Action Plan, covering investment intermediaries and financial markets. It replaces the previous Investment Services Directive (ISD). MiFID extends the coverage of the ISD regime and introduces new and more extensive requirements for firms, in particular in relation to their conduct of business and internal organisation.

At its heart, the MiFID test is designed to make sure that customers understand the risks involved in spreadbetting, particularly the risk of incurring a loss greater than their original stake.

In simple terms the effect of all this on Spreadbetting is that investors that wish to open a new spreadbetting account will start to face far tougher rules.

When will new MiFID rules on Spreadbetting take effect?

It is not yet clear, as the FSA is still producing its own guidelines on the interpretation of MiFID with regards to Spreadbetting companies. However implementation is expected to be phased in from summer onwards.

What should I do?

The simple answer is that if you want to start or change spreadbetting account, open an account now. Get ahead of the new rules and the account opening process will be far cheaper and easier, both for you and for the spreadbetting companies. As a result some companies are offering generous bonuses to open an account now. See the Spreadbetting companies page for details of some of the most generous offers.

How will the vetting be done in future?

It is too early to know, and is likely to vary by company. However the tests of appropriateness for customers will be more stringent than the existing simple assessments that firms must adhere to under rules set by the Financial Services Authority.

The simplest way of providing evidence of suitability is to provide evidence of prior experience of spreadbetting or another complex financial speculation tool, according to legal experts, which could rule out first-time investors.

“At the moment, spread betters face a light touch regime from the FSA as firms can take on almost anyone,” reports says Ash Saluja, a senior partner at law firm CMS Cameron McKenna. “From November, when spreadbetting firms take on a client, they will have to make sure that spreadbetting is appropriate for that person,” he says. “For the novice, it won’t be possible to open an account. Clients will most likely need proof of experience, perhaps provided via a detailed questionnaire.”

What are the advantages of MiFID?

Some analysts believe that MiFID adds offers more opportunities than it does restrictions. In effect the rules will open up new parts of Europe to derivative trading such as spreadbetting and using contracts for differences. “It will open a lot of doors to new jurisdictions, which will become a major focus for us next year,” he says. In terms of spreadbetting this is likely to mean new non-UK markets, which will reduce spreads and costs for everyone.

The new rules should also guarantee customers the best possible prices for their investment trading, as spreadbetting firms have previously been exempt from “best execution” rules. Providers will need to guarantee the best possible outcome from financial dealings from November.

There is vigorous debate in the industry about how much these changes will impact spreadbetting companies, as it will almost certainly mean more work to justify and to substantiate their internal pricing.

Despite the effort MiFID should mean that the new markets opened, along with the best execution rules, should bring new fairness and openness to the spreadbetting markets.

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