The Financial Conduct Authority (FCA) is consulting on proposals for stricter rules for firms selling ‘contract for difference’ (CFD) products to individuals, after research showed 82% of consumers lost money on this kind of spread betting, with many in danger of incurring ‘rapid, large and unexpected’ losses
The regulator says its aim is to address growing concerns about high losses to retail customers to improve standards across the sector and ensure consumers are appropriately protected.
Contracts for differences, such as spread bets and rolling spot foreign exchange products, are complex financial instruments offered by investment firms, often through online platforms.
Following an increase in the number of firms in the CFD market, the FCA has concerns that more retail customers are opening and trading CFD products that they do not adequately understand. Its analysis of a representative sample of client accounts for CFD firms found that 82% of clients lost money on these products.
The proposals include introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of these products.
The FCA also wants providers to set lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1. They should also cap leverage at a maximum level of 50:1 for all retail clients and introduce lower leverage caps across different assets according to their risks.
The regulator claims some levels of leverage currently offered to retail customers exceed 200:1.
In addition, the FA is seeking to prevent providers from using any form of trading or account opening bonuses or benefits to promote CFD products.
The FCA is also outlining a range of policy measures for binary bets that would complement existing conduct of business rules, once these products are brought into the FCA’s regulatory scope.
Christopher Woolard, the FCA’s executive director of strategy and competition said: ‘We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products.
‘The FCA also has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need.’
Several EU member states have already introduced restrictions on CFD retail products.
The consultation closes on 7 March 2017.