Crisis gets personal after UK traders spread-better fails

Written by Bloomberg | Updated: Apr 14 2012, 06:07am hrs
For Britons who play the markets for a living, the collapse of spread-betting firm WorldSpreads Group (WSPR) was the moment the financial crisis got personal.

About 15,000 clients, some of whom work for banks and stockbrokers, face losing cash in their personal WorldSpreads accounts after they were frozen last month. The London-based company was put into administration, a form of UK bankruptcy protection, on March 18.

Its a woeful situation, said Richard Jennings, 38, a former fund manager at West Yorkshire Pension Fund in Leeds, which oversees assets for the regions government employees. He had more than 100,000 in his WorldSpreads account when it collapsed. We want some answers from the administrators.

WorldSpreads is being investigated on suspicion of fraud by the City of London Police, according to a person with knowledge of the case, as accountants wind down the company and probe a 13-million shortfall in client funds.

Spread betting, which resembles futures and options trading, is a popular way to speculate on stocks in the UK. Its regulated as gambling, not investing, meaning firms clients dont pay tax unless its their primary source of income.

WorldSpreadss collapse renews concern that financial companies may not be segregating clients money. The Financial Services Authority has said it plans to increase scrutiny of spread-betting companies and other firms that hold client funds after the demise of WorldSpreads, which followed the collapse of brokers MF Global Holdings in October and Pritchard Stockbrokers in March.

Since MF Global happened, Ive got no faith in the auditors, no faith in the regulatory system, said Nirav Shah, who had 250,000 frozen across his five accounts at WorldSpreads. Its all been abused. Its going to happen time and time and time again. Whos next

Jennings has formed the WorldSpreads Action Group, which represents 18 clients who each stand to lose more than 100,000 if the company cant meet their claims. At least three of these people have day jobs working for financial firms in London, said Jennings, who now runs Spread Bet Magazine, an online publication.

His group plans to navigate the compensation process and examine whether it has a legal recourse against the companys executives. Former CEO Conor Foley stepped down on March 14, two days before WorldSpreads had its shares suspended and said it identified a hole in its accounts. Former finance director Niall OKelly resigned in February.

Firms such as IG Group Holdings (IGG) and CMC Markets (CMCM) let clients take positions on markets without buying or selling actual securities, currencies or futures. IG Group says British spread betting has grown 10-fold in 12 years as the internet has made wagers easier. Almost 100,000 Britons regularly made spread bets last year, compared with 91,000 in 2010, according to Sydney-based research firm Investment Trends.

The companies profit through the initial spread, or the difference between the price offered to clients on opposite sides of the same trade. They also charge interest on funds loaned to clients to boost the size of their trades.

IG Group, CMC, City Index and Gekko Global Markets arent involved in WorldSpreads failure and are not the subject of any regulatory actions.