“I know of people who have had to tell their partner they don’t have the deposit for their house move,” says David, who is helping to coordinate a support group for customers with money trapped in the failed betting platform Football Index but wishes to be known only by his first name. “People have had to cancel weddings because of it, there are others who’ll have to tell their partner that they have a £10,000 credit card bill that they can’t pay. The things I’ve heard over the last few weeks beggar belief, and there will be thousands more out there who are still suffering in silence.”
It is just over a fortnight since Football Index closed its self-styled “Football stock market”, a few hours before the Gambling Commission suspended the company’s licence. Launched in October 2015, Football Index offered its users the opportunity to buy what it described as “shares” in professional footballers, which would then earn “dividends” – from 1p to 14p per share – over a three-year period according to a structure, which it devised, based mainly on a player’s performances on the pitch.
In its appearance, its terminology and its marketing, Football Index mimicked an investment platform, selling genuine shares in real-world businesses. The only suggestion on its home page that it was, in fact, a regulated betting site was an easy-to-miss strapline warning it “should not be viewed as an investment vehicle”, added at the insistence of the Advertising Standards Authority in September 2019. But its “shares” were bets. A user who spent £10 on a share in Bruno Fernandes was betting they would make more than £10 in dividends from the Manchester United player over the next three years.
They could also – in theory at least – “cash out” of a bet by selling the share to another user. But unlike a punter with a regular bookie, staking £10 or £20 per week, a customer buying in to Football Index for the first time was obliged to put three years’ worth of gambling money up front and wait for their returns – again, more like an investment platform than a bookmaker.
Football Index claimed to have around 500,000 account holders, and estimates of the amount of money trapped in the exchange when it collapsed range from £60m to £90m. “Plenty of the people who are contacting me on Twitter are absolutely distraught,” David says. “They were minting [selling new “shares”] right up until the final minute, and what is worse is that they were putting incentives and rebates on the website, actively inducing people to put more money in to something that they must have known was failing. They were putting money into nothing. There are lots of people who have made bets and, unfortunately, instead of setting aside funds to honour those bets, the bookmaker has decided to liquidate the company, effectively.”
Almost from the day of its launch, there were concerns in the wider gambling industry that Football Index’s business model was deeply flawed. As the Guardian revealed a few days after its collapse, the Gambling Commission was warned in January 2020 that the company was “an exceptionally dangerous pyramid scheme under the guise of a football stock market”, and that “if user growth [were to] stop or decline, the company would quickly find itself unable to pay its liabilities [ie dividends] to users.”
As a result, one of the many questions that remain unanswered about the scandal is why was it licensed by the Gambling Commission at all? Like many football fans, casual and committed alike, Thomas, who also wishes to withhold his surname, started to notice advertisements for Football Index on black cabs and tube trains a couple of years ago. Unlike most football fans, Thomas spends his weekdays working for one of the biggest investment banks in the City, on a desk which trades volatile financial products called derivatives. When he took a closer look at what Football Index had to offer, what he found seemed both familiar and surprising.
“Many people in the City were completely astonished that Football Index was able to open and run a fully-blown market-making platform without any oversight from the FCA [Financial Conduct Authority]”, he says.
“Legally, the entire platform was set up as a betting enterprise rather than an investment firm, but the structure and marketing bears so much similarity to retail investment that it’s bizarre that this wasn’t brought under their purview.”
From Thomas’s point of view, shares on Football Index were not shares at all. They were, in essence, derivatives, like those that he and other traders spend their days buying and selling in the City. The dividends, in turn, depended on rules set by Football Index itself, rules which the firm could – and frequently did – change as it went along. The rules that apply in the City, on the other hand, are not so flexible.
“Every transaction in the UK has to be reported in real time to the regulator,” Thomas says. “It’s onerous, but it gives the FCA real-time surveillance of the markets. The moment you hit ‘buy’ on a derivative, you also get pages of documentation with it, all kinds of information about the calculations behind it, the pricing, who to call with a problem, and also the risks.
“We are required to build in what’s called ‘downside’ protection, which means customers can never lose more than they’ve invested, and at the end of every day, we are required to know exactly where every client’s investment is. Again, it’s time-consuming and expensive, but the core principle is that if you’re investing money, it may go up or down in value and you should be aware of the risks, but it will be safe.”
An FCA-regulated market is also required to ensure sufficient “liquidity” at all times, allowing clients to in effect “cash out” of their positions. Football Index had a “safety net” option – allowing users to “instant sell” their shares back to the firm – until March 2020, but it was removed at the start of the coronavirus pandemic as football leagues shut up shop across Europe.
“We must always provide enough liquidity in the market to ensure that even though the price might not be good, customers have that option,” Thomas says. “If you did that [removed instant sell] in normal derivatives trading, that would be judged to be non-compliant [by the regulator] and you would usually be booted off the exchange and fined.”
The FCA’s regulations are primarily aimed at customer protection, but there are also rules that allow banks and brokers to “hedge” against the possibility that their clients will make money at a rate that the market cannot sustain. This, Thomas says, may have been another factor in FI’s downfall: their customers were simply too good at playing the game.
They homed in on players such as Jadon Sancho and Bruno Fernandes, who returned dividends week after week, and ignored all the players who were, from Football Index’s point of view, the ones that would make the firm the most money. “If you’re a bookmaker, bets are largely time-limited,” he says. “The bookie knows calculations run to the end of the match or the horse race, and they offer odds with a margin, but competitive enough to attract business.
“The knob you have to twiddle to control that is your odds, and you can model how much you will make or lose on every outcome. Open-ended products like financial derivatives are risk-managed in a very different way. This is where they [Football Index] might have come unstuck. My suspicion is they got their modelling wrong, they had no way to hedge the risk and people zeroed in on the successful footballers that were going to pay out dividends. The only way to pay out the derivatives they had already made was to get more people to put money in.”
Ultimately, though, he questions whether Football Index should ever have been able to operate as it did in the first place. “Shares are, for the most part, a very stable investment, safe and regulated well,” he says. “You shouldn’t be able to offer people shares that are actually bets, and you shouldn’t be able to offer bets that are actually derivatives.”
It will be months, if not years, before the full story of Football Index’s collapse is told. Administrators have been appointed to sift through the accounts of BetIndex, its parent company, while the legal firm Leigh Day is in the early stages of a possible class action, seeking redress for thousands of former customers. With the industry’s overall regulatory framework also under review at present, it could yet be a scandal that prompts major changes to the gambling laws.
“If there’s no change and no remuneration, what message does that send to companies in the future?,” David says. “It would tell them that the Gambling Commission would take the fall and they will get away scot free. I don’t think that’s the message the British government would want to send out to people who are doing this to UK punters.”