The Financial Conduct Authority has stated it will take "swift and assertive action" if it identifies any consumer harm when it comes to the creation and promotion of contracts for difference (CFDs).
In a Dear CEO letter from the City watchdog, the regulator reminded firms offering CFDs that the products are highly leveraged derivatives and adverse price movements in relevant markets could lead to substantial losses for consumers.
Sarah Pritchard, executive director of markets at the FCA said: "We have set out the standards we expect CFD firms to demonstrate in order to protect consumers and ensure market integrity.
"CFD providers authorised in our regime must sell products appropriately, and when the new consumer duty comes into effect, will need to ensure that products deliver good outcomes for retail consumers.
"We will not hesitate to take swift and assertive action where we identify harm."
According to the six-page letter, the FCA has found continued poor practice in the business models of a "significant minority of firms".
The FCA highlighted:
- Scam/churn activities: a small number of firms in the UK’s Temporary Permissions Regime have targeted consumers for whom CFDs are inappropriate and use scam/churn techniques to directly profit from their clients’ losses.
- Circumvention of FCA Rules: Some firms circumvent our rules by inappropriately ‘opting-up’ retail consumers to ‘elective professional’ status, sometimes using incentives banned under the FCA's rules. Other firms were redirecting retail customers to associated CFD providers incorporated in third-country jurisdictions without equivalent consumer protections.
- Affiliate marketers/ introducers: many firms have used unauthorised affiliates to introduce clients, paying them for their introductions. Firms’ oversight of affiliates is often inadequate and sometimes part of a deliberate strategy to exploit consumers, especially when combined with the poor behaviours mentioned above.
- Additionally, the FCA has found examples of companies using unqualified influencers, fake celebrity endorsements, pressure-sales tactics, inducements and some firms giving investment advice without authorisation.
The FCA letter stated: "The FCA expects all firms to have agreed actions and next steps in response to these concerns by January 2023 and in advance of the new consumer duty coming into force."
The FCA has been monitoring CFD activity for more than a decade, having noted the significant harm done by CFD products to clients in the financial crisis and since 2008.
Put simply, as explained by FTAdviser when the FCA put permanent restrictions around marketing the products in 2019, CFDs are derivatives that allow investors to profit from the movement in the price of an asset, without ever owning it.
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.
But firms have failed repeatedly in their risk warnings, communications, pressure-sale tactics and marketing, according to the FCA.
The 2019 restrictions follow action taken by the European Securities & Markets Authority in 2018, which placed restrictions on the marketing, distribution or sale of CFDs.
Even as far back in 2013, a successful court case brought by the the FCA to the Court of Appeal set a precedent for trading activities based on buying derivatives rather actual shares to be considered as ‘market abuse’ under existing laws where they breach regulatory guidelines.
The regulator's latest missive stated: "We continue to have serious concerns about the distribution of CFDs to retail clients. In particular, we are concerned that these complex, speculative products are reaching a wider target market than is likely appropriate.
"As such, the quality of firms’ policies and procedures in relation to client on-boarding and assessment of appropriateness will remain a key focus for us.