The Financial Conduct Authority (FCA) has introduced permanent restrictions on how Contract for Difference (CFD) products can be sold to retail investors.
CFDs are derivative products that allow investors to profit from the movement in the price of an asset, without ever owning the asset.
Typically a buyer agrees to pay the difference between the price at which a share trades now, and the price at a stipulated date in the future.
If the price is higher in future, then the buyer pays, but if the price is lower, the seller pays the difference to the buyer.
The regulator has announced that the amount of leverage an investor can apply to their CFD holding will be limited and that CFD providers must inform a retail investor if the funds fall to below 50 per cent of the margin needed for a client to keep an account open.
They must also provide protections to ensure a client cannot lose more money than the total value of the assets in their CFD account, and stop offering inducements, whether monetary or non monetary, to entice a retail investor to trade.
Firms must also provide a standardised risk warning to reveal the proportion of retail clients that lose money on CFD investments.
The new rules are making permanent the temporary measures introduced by the European Securities and Markets Authority (ESMA).
The FCA confirmed it has included firms that sell what it calls "CFD-like products" in the rules, as it feels there would otherwise be the potential for firms to skirt the rules.
The rules apply to CFDs from August 1, and from September 1 to CFD-like products.
Christopher Woolard, executive director for strategy and competition at the FCA, said: "Our intervention follows evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them.
"We saw firms offering CFDs with increasingly higher leverage, resulting in high proportions of consumers losing money. EU rules are temporary. The new rules maintain and strengthen protections for consumers."