Concerns are rising over the emergence of new-style online trading platforms that encourage stock market novices to invest in complex financial instruments.
Critics say the websites, which offer free trading, are promoting financial products unsuitable for long-term investing – taking advantage of the fact that hundreds of thousands of Britons are looking to better the miserly returns they earn on cash deposits.
One expert says the new platforms are no more than online ‘gambling venues’, while others are keen for the regulator to step in so that novice investors do not end up losing money in highly speculative trades. Some have already raised their concerns with the Financial Conduct Authority.
Roulette?: Critics say the websites are promoting financial products unsuitable for long-term investing
One of the most popular websites is eToro. It has attracted half a million new customers of all ages in the UK in the past year. A rival called Trading 212 has grown the assets on its platform from £100million at the start of last year to more than £1.2billion today. Its app is now the third most downloaded free financial app on Apple devices. NatWest’s online banking app ranks just tenth.
Both eToro and Trading 212 offer free trading – unlike the traditional wealth platforms provided by the likes of AJ Bell and Hargreaves Lansdown. They also let investors buy fractions of shares – attractive to novices looking to invest small sums.
The online marketing tools used by eToro are sophisticated. If you type ‘how to start investing’ into Google one of the first results that comes up is eToro. Its platform is easy to use and ideal for those who want to gamble on Bitcoin or another flavour of the month, such as electric car maker Tesla.
Yet the array of complex investments it offers means that it is required to carry a disclaimer on its website: ’71 per cent of retail investor accounts lose money when trading CFDs with this provider.’
CFDs are contracts for difference and differ markedly from real shares (see box). The platform also lacks the tools needed to build longterm wealth. So eToro doesn’t offer investors a chance to buy funds or investment trusts – the fundamental building blocks on which most sound portfolios are built – though it does offer Exchange Traded Funds.
Nor does it offer Individual Savings Accounts or Self Invested Personal Pensions – the wrappers that keep investments free from tax.
For traders who want a punt, know what they are doing, and are not investing for the long term, these websites can be fun to use.
But critics believe they blur the lines between what they do – and what traditional wealth platforms provide. For example, Trading 212 carries a table comparing its fees with traditional rivals such as Hargreaves Lansdown, suggesting they are of a similar ilk.
Two traditional wealth platforms, Interactive Investor and Freetrade, have written to the regulator claiming that some of these new trading platforms are misleading investors by drawing them in with free share trading – before pointing them towards risky financial instruments. Neither Interactive nor Freetrade sell CFDs. Alex Campbell, at Freetrade, says: ‘There has been an explosion in interest in share dealing and there are lots of positives and negatives as a result.
‘But we are concerned when platforms offer free share dealing as a loss leader to get customers through the door – and then offer them risky financial products.’ Richard Wilson, chief executive of Interactive Investor, says: ‘It’s fine to put a tenner on Tesla for a bit of fun, but you wouldn’t bet your pension on it.’
He adds: ‘It needs to be quite clear when you go on to a website whether you are entering a gambling venue or a wealth platform.’
Football giants cashing in, too…
Worryingly, as many as 80 per cent of Premier League football clubs have official sponsors that sell CFDs and cryptocurrency, according to new research for financial advice firm OpenMoney.
While the link between football and betting firms has come under scrutiny recently, risky online brokers have no restrictions on how they promote their services to fans.
Clubs including Everton, Leicester and Crystal Palace have a partnership with eToro. Until lockdown, it was hosting free trading lessons at stadiums. Leeds United has a partnership with FXVC, and Chelsea with Go Markets. Both are CFD brokers based in Cyprus.
Up to 88 per cent of FXVC customers and 44 per cent of Go Markets customers who invest in CFDs lose money, they reveal on their websites. Anthony Morrow, co-founder of OpenMoney, warns that CFDs ‘are no different to gambling with your cash’. He adds: ‘As a financial adviser, we’d say these complex, sophisticated investments have no place in people’s financial plans.
‘The fact that these high-risk investments can be promoted to football fans through club sponsorship and advertisements during matches without any restrictions is wrong.
‘Most people are unaware of the risky nature of these unregulated investments. I believe there should be far tighter regulations to stop them causing serious financial harm.’ In reply, eToro says that 85 per cent of its assets under administration are real – and not CFDs – globally. It says it restricts access to CFD trading by asking customers to complete an ‘appropriateness test’ first. It says those who don’t pass can’t buy them.
But The Mail on Sunday has found a way that customers can circumvent the test: eToro allows its customers to ‘copy’ other investors on its platform, replicating their portfolios. So, if you copy an investor who holds CFDs, you will be buying them also, whether you have passed the appropriateness test or not.
While eToro says it does not let investors copy the riskiest portfolios, it admits some contain CFDs. It told The Mail on Sunday: ‘It’s important people understand the risk. We’re not here to catch anyone out.’
Holly Mackay, of investment website BoringMoney, believes regulation of this breed of trading website must be beefed up. She says ‘They are regulated in the same way as traditional investment platforms. At some point the regulator must acknowledge there are a lot of people piling into high-risk investments and react with tougher regulation.
‘These brokers are more likely to sell the dream of picking the next Amazon, whereas traditional platforms are more likely to preach a message of diversifying investments. The latter is less sexy but also less likely to go pear-shaped.’
Mike Barrett, a director at financial researcher the Lang Cat, agrees. He says: ‘You can dress up investments as sexy, cool or exciting. But for most people the best option is a middle-of-the-road, sensible investment strategy that they stick to.’
Trading 212, FXVC and Go Markets did not respond to requests for comment.
WHY CFDs ARE SUCH A GAMBLE
The CFDs that you can trade on the likes of eToro are ‘contracts for difference’. These are financial instruments that allow you to place a bet on whether you think an asset will rise or fall in value.
For example, if you think the share price of Microsoft is going to rise you could buy a CFD that pays out if you are proven right. You lose money if the share price falls. The big difference is that you do not own the Microsoft shares.
The attraction is that with a CFD you can use leverage – effectively debt – to increase the size of your bet. This means that if your prediction is correct, you make several times more money than if you had bought the shares outright.
However, your losses will also be far greater and in general, most private investors lose money on CFDs.
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