UK regulators are reviewing prediction market activity after Polymarket took around $77,500 in bets on whether major banks including HSBC and Lloyds Banking Group will fail by the end of 2026, raising concerns about market manipulation and the potential for bets to amplify financial instability.

The Financial Conduct Authority told the Guardian it has been speaking with international regulators about prediction markets as part of efforts to protect market integrity. The FCA's engagement comes as regulators assess the risks posed by platforms where users can take financial positions on events with potentially significant economic consequences.

The contracts cover banks including JPMorgan Chase, BNP Paribas, Deutsche Bank, HSBC and Lloyds, with Polymarket allowing approximately $77,507 worth of positions across the markets. Residents of the UK, US, Canada and EU are prohibited from using the platform's offshore service, although users can attempt to circumvent restrictions through virtual private networks.

Bobby Dean, a Treasury committee member and Liberal Democrat MP, told the Guardian that the platform could be exploited to influence sentiment around banks. “Polymarket has a poor reputation for stopping insider trading or bad actors placing bets on their platform, so it’s easy to see how it could be exploited to try to aggravate real shifts in market sentiment,” he said.

Dean warned that rapidly increasing activity could have consequences beyond the platform itself. “If the bank-related activity grows on the platform and then a particular market was to escalate rapidly, it could even trigger bank runs,” he said.

The European Securities and Markets Authority warned in a September risk report that prediction markets face heightened risks from insider trading and manipulation, particularly blockchain-based platforms such as Polymarket where identity verification can be limited. ESMA cited incidents involving alleged profitable trading ahead of significant geopolitical events and suspected interference with data used to settle prediction contracts.

Polymarket's chief legal officer Neal Kumar defended the bank-failure markets, arguing that the underlying information was already available to professional investors through established financial instruments. “Polymarket simplifies the question, providing a much larger audience with information, and markets serve as a powerful source of information and combating disinformation,” Kumar said.

The Bank of England said its supervisors regularly engage with companies on market developments and emerging risks. HSBC and Lloyds declined to comment, while the Treasury did not respond to requests for comment by the newspaper.

The concerns come after bank failures in 2023, including Silicon Valley Bank and Credit Suisse, were accompanied by rapid withdrawals and heightened speculation across social media platforms.

---