UK watchdog says spread-betting firms are putting consumers at ‘serious risk’
The FCA said 76% of retail customers who bought CFD products lost money as a result.
Britain’s financial watchdog has sent a warning letter to spread-betting firms, saying consumers are “at serious risk of harm” as a result of poor industry practices after finding the majority of customers lost money through their trades.
It follows a review by the Financial Conduct Authority (FCA) into the industry’s use of contracts for difference (CFD), referring to a type of derivative product that sees investors speculate on whether the movement of the stock will fall below or rise above the respective bid and offer prices quoted by the spread-betting firm.
“The review uncovered areas of serious concern that we want to highlight to firms across the industry,” the FCA said in its letter to chief executives.
The regulator said it discovered that 76% of retail customers who bought CFD products in the period covered by the review, July 2015 to June 2016, lost money as a result.
The providers of CFDs, which the FCA described as “complex, high risk instruments”, were also found to have “weak” conflict of interest controls, as well as “ineffective” communication, monitoring and challenge practices that fell short of expectations at some firms.
That is on top of “flawed” due diligence processes when taking on new distributors of CFDs.
The FCA stressed that, in light of the high level of risk involved with CFDs, it was critical that firms comply with its rules.
“Given the significant weaknesses we found across our sample, we believe there is a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CFDs.
“As a result, consumers may be at serious risk of harm from poor practices in this sector,” the FCA warned.
Chief executives have now been told to “consider” whether their firms are complying with FCA requirements.
Some companies have already said they plan to stop offering CFDs to distributors that provide the contracts on an advisory or discretionary basis, as a result of the FCA review, while others are no longer offering them to retail consumers.
The FCA said it identified one firm “whose arrangements were so poor” that it now plans to “take further action”, though that provider was not named.
The letter spooked investors, sending shares of companies that offer spread betting services lower in morning trading.
Plus500 tumbled more than 4.7% or 54p to 1,079p, while IG Group dropped over 3% or 24.5p to 754.5p, and CMC Markets fell 3.8% or 6p to 151.6p