FCA sounds warning on retail CFD market

15 January 2018

The FCA has warned contracts for difference (CFD) brokers to treat their customers fairly or face regulatory action.

In a letter sent on 10 January to providers and distributers of CFDs, the FCA has advised that poor practices in the sector are putting retail clients “at serious risk of harm”.

Having concluded a 12 month review of the sector, the FCA has identified serious failings, with none of the 19 firms reviewed emerging with a clean bill of health and one falling so far short that it has been made subject to immediate action.

The principal areas of weakness included ineffective client categorisation, inappropriate staff remuneration incentives, and conflicts of interest.  The survey found that over three-quarters of consumers lost money during the review period – and that included those trading on the basis of advice as well as on an execution-only basis.  It is a sobering statistic which is unlikely to feature on brokers’ glossy Tube adverts any time soon.

The FCA’s warning letter follows last month’s announcement by the European Securities and Markets Authority that it was considering a more severe than expected range of measures to crack down on the high-risk sector, including the imposition of limits on the leverage of opening positions and negative balance protection.   

CFDs with cryptocurrencies forming the underlying investment have been proving a particular headache for regulators due to their inherently volatile character.  They were the subject of a particularly robust warning by the FCA to consumers in November last year.  Yet it is of course the volatile nature of cryptocurrencies, in combination with the leverage offered by CFD products, which make them so appealing to investors.

The retail CFD market is likely to face an increasingly hostile regulatory landscape as European regulators work together to try to protect amateur investors from themselves, with those seeking to capitalise on the current bitcoin zeitgeist seen as being particularly at risk.  The risk of hugely magnified losses arising from speculative and highly-leveraged trading is clear.  So too is the need for regulators to ensure adherence to existing rules and proactively consider whether more protections are required.  Doing so can only bring about better consumer outcomes, as well as strengthening the position of those brokers within the sector who do play by the rules.

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