Seán Ardagh (Dublin South Central, Fianna Fail)

A question arises about whether Paddy Power should be regulated by the Financial Services Regulator. I can understand that it was a Nick Leeson, tongue in cheek, bet; it was a punt, and it is a Paddy Power type affair, but when one considers that type of affair is being carried out by stockbrokering firms which put themselves forward as being the leaders of society, one wonders about it.

City Index was the company that was fined. I will not name it but there is a major stockbroking firm in Dublin that has become high profile in selling CFDs in the past few years. When one clicks on this stockbroking firm's CFD and financial spread betting web pages, one reads that City Index Limited, in association with the stockbroking firm, offers various spread bets and CFDs. Providing everything is kosher, and City Index has paid the fine and served its time, it and everyone can move on. However, looking further into the particular stockbroking firm I saw an example set out of what would happen in a case of spread betting or buying or trading in CFDs. The example shows the spread bet on a number of shares would be far more attractive than the money made on a share trade. Based on the figures used in the example, the return on the initial investment from trading conventional shares is 12.07%. This can be compared to the return of 121.25% using financial spread trading. However losses could be magnified in exactly the same way. I accept this warning is in the small print.

A similar calculation is made for CFDs. It shows that the return on an initial investment from trading conventional shares is 1.1%, which can be compared to a return of 24.1% using the firm's CFDs. There is no mention in this case of the possibility of increased losses. There is no example provided of what would happen if the shares go down instead of up, which has been happening over the past four months in the current bear market. There is a question to be asked with regard to how CFDs are being sold.

The constituent who phoned me the other night was very concerned about the vulnerability of private clients. I use the term private clients, but in England the financial services authority has what it calls intermediate clients. Intermediate clients are people where there is sufficient evidence to support a classification of intermediate customer. Such a person can reasonably demonstrate this and there is evidence that the person has appropriate experience and understanding with regard to the requirements set out in a code of practice. Also, the firms should retain and record the information by which they have come to assess a particular customer as being of intermediate status, the status at which CFDs can be sold to the person.

I am particularly concerned about people who fund their own pension, self-employed people who work hard and administer their own pension fund. We know that to buy an annuity to fund the pension of an ordinary backbencher in the Dáil would cost in excess of €1 million. Therefore, a fund of €700,000 or €800,000 would probably provide a self-employed proprietary director with a pension of €35,000 to €45,000, which is not excessive in today's terms. If this person has €300,000 of that fund in equities, we can imagine the target he makes for unscrupulous stockbrokers who see such a margin and profit in CFDs for themselves.

There was a very good article by Dominic Coyle in The Irish Times yesterday relating to CFDs. The article stated a director of the private banking section of a major bank here said its policy "was, and still is, that the risk on these products outweighed the potential return and we never recommended investment in such propositions".

The article continued:

That may be so, but CFDs have certainly been big business for stockbrokers and the Irish Stock Exchange. It is somewhat ironic that one of the most aggressive sellers of CFDs in the Irish market has been [a company, in which the particular bank had a large stake until end-October 2006] . . .

If the money of the well-heeled clients of [that private banking sector] and other like-minded wealth managers has not been directed into such highly leveraged products, the question is whose has been. At the start of the summer, more than €1 billion of Irish investors' funds were resting in CFD contracts.

The suspicion is that many of those investing in CFDs should never have been dabbling in such exotic instruments. Either they themselves did not pay sufficient warning to the stark warnings in the small print or they were not sufficiently vetted.

This brings us back to the responsibility of stockbroking firms to classify customers properly so that only those who have the capacity, knowledge, experience and excess funds areinvolved.

On self-administered pension schemes, the Revenue has a set of rules which sets out what people can or cannot invest in. I contacted the Revenue yesterday to find out whether CFDs are acceptable and they are. Nothing has been put in place yet to stop this. These things take time. On the basis of CFDs being allowed, one would expect that the person with a self-administered pension scheme could also invest in paddypowertrader.com and do some spread betting, because there is no difference between the two. There is a need to examine whether people with self-administered pensions should invest in such high risk financial products and derivatives. When the Revenue set out what is allowed, the idea was to ensure prudence and that people would not get involved in high risk areas where their fund would be put at risk.

Last Sunday in the Sunday Independent, Senator Shane Ross wrote an excellent article on the issue of CFDs. He called a CFD a "casino for delinquents". He said:

Irish stockbrokers love stuffing Irish punters into Irish companies. They often double as brokers to the same companies . . . CFDs are a stockbrokers paradise . . .

CFDs have nothing to do with investment. They are gambling chips. Borrowed gambling chips at that. Put very simply, you can borrow up to 90% of the cost of a stock and then bet the lot on it.

Brokers encouraged the madness. They raked in the commission; they charged the punters brokerage — not just on their 10%.

Therefore, if somebody put up €10,000 the brokers charged commission on the whole €100,000 at 0.5%. The investors were therefore charged €500 on their €10,000 to buy in and €500 to sell out. This is €1,000 commission on one €10,000 trade. The brokers only went for people who traded actively. Many people in stockbroking firms made a lot of money which is part of the reason their bonuses are so high. This system is all wrong.

A question must be asked with regard to the use of CFDs by companies in play and open to takeover. We have seen stocks in the Irish Continental Group being held by Cantor Fitzgerald for certain companies. This is perfectly kosher.

See this speech in context