FCA proposes stricter rules for contract for difference products
The Financial Conduct Authority (FCA) is today proposing stricter rules for firms selling ‘contract for difference’ (CFD) products 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 says it has concerns that more retail customers are opening and trading CFD products that they do not adequately understand.
The City watchdog’s analysis of a representative sample of client accounts for CFD firms found that 82 per cent of clients lost money on these products.
The FCA is therefore proposing a package of measures intended to enhance consumer protection by limiting the risks of CFD products and ensuring that customers are better informed.
The new measures include:
The FCA is also setting out its vision on 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, executive director of strategy and competition, said: “We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses. 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.”
On-going supervision work by the FCA over the past six years has identified instances of poor conduct across the CFD sector.
This includes firms failing to adequately consider if CFDs are appropriate for their customers, failing to provide adequate risk warnings, and firms offering excessive levels of leverage to retail clients.
The FCA has also observed that binary bets are not transparent enough for investors to adequately value them, and have product features which are more akin to gambling products than investments.
The FCA’s proposed measures are intended to ensure an appropriate level of consumer protection. Several EU member states have already introduced restrictions on CFD retail products.