Watchdog warns firms over CFD mis-selling risks

The UK financial watchdog has warned it will crack down on companies offering a highly-leveraged investment product to retail customers if they breach marketing and selling rules. 

In a letter on Thursday, the Financial Conduct Authority raised concerns over a “significant minority” of contract for difference (CFD) brokers undertaking pressure selling, charging inappropriate fees and refusing to process withdrawals.

CFDs are a type of equity derivative which allow investors to profit from price movements without owning an underlying asset. Investors bet on whether the value of an asset will rise or fall, agreeing to pay the difference across a set period. 

Financial companies can only offer CFDs to appropriately experienced retail investors. With recent market volatility increasing the risks, the FCA has, in effect, restated previous warnings as it attempts to strike a balance between encouraging investment and preventing novice traders from gambling away their savings.

“CFD providers authorised in our regime must sell products appropriately,” said Sarah Pritchard, FCA executive director of markets. “When the new consumer duty comes into effect, [providers] will need to ensure that products deliver good outcomes for retail consumers.” 

The FCA estimates 80 per cent of customers lose money on CFDs. Regulators first cracked down on the sale and marketing of products to retail clients three years ago. 

It forced brokers to limit the leverage they offered investors to a maximum of 30:1, with more stringent controls put in place for volatile assets. CFDs had grown in popularity due to the chance of significant returns and a range of bonuses offered to investors by platforms.

Providers were also required to close a customer’s position when funds fell significantly, while providing protections to ensure they could not lose more than the total they had initially invested. 

“This sector is for people who have passed an appropriateness test and want to deal in leverage,” said Ben Williams, an analyst at Shore Capital. “It’s a question of whether the regulator decides an industry with 70 per cent loss ratios is necessarily a bad outcome.” 

The FCA has pointed to “inherent conflicts of interest” that exist in trades, particularly when platforms profit from client losses by under-hedging an investment. It argues current market volatility could be misrepresented as an opportunity for more frequent trades. 

In 2020 and 2021, the regulator stopped 24 firms marketing CFDs in the UK; it estimates measures prevented £100mn in harm last year alone. 

Warnings were issued a day after the FCA set out its plans for a “simplified financial advice regime” as it seeks to encourage more people with savings to invest in “mainstream products” such as stocks and shares Isas. 

Proposals are intended to make it easier for people to seek financial advice by spreading payments, while encouraging lower fees through simplifying paperwork and reducing certain qualification requirements. 

From July next year, companies will operate under new consumer duty requirements, obliging providers to ensure clients understand the services they seek.

Traders say FCA-approved platforms selling CFDs — including larger operators such as IG Group, CMC Markets and Plus500 — will need to ensure investors understand the risks associated with the products.

IG Group said the company fully supported the FCA’s aims to “uphold high conduct standards”. CMC Markets and Plus500 did not provide comment.