The Financial Conduct Authority is cracking down on firms selling “contract for difference” products to retail consumers.
It has noticed an increase in the number of firms offering CFD products, including spread bets and rolling spot foreign exchange products, and raised concerns that retail investors are trading products they do not understand.
The FCA’s analysis of client accounts for CFD firms found that 82 per cent of clients had lost money on these products – and there is evidence these losses tend to be higher when sold on an advised basis rather than a non-advised basis.
The average result per client was a loss of £2,200.
It has raised concerns with the conduct standards of some intermediary firms who are offering advisory or discretionary-managed account services solely in relation to retail CFDs.
It said: “We have concerns around the level of client losses and potential conflicts of interest related to these business models due to high commissions charged to clients.
“The suitability of advice or portfolios offered by these ‘advisory’ firms also appears highly questionable.
“We are currently carrying out further supervisory work in this area to address these issues.”
The FCA has proposed standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts, to help investors understand the risks and historical performance of the products.
Providers would also be prevented from using any form of account-opening bonus to promote their products.
Meanwhile leverage would be capped at a maximum level of 50:1 for all retail clients, with lower caps across different assets according to their risk.
At the moment retail investors are being offered some levels of leverage which exceed 200:1.
Christopher Woolard, executive director of strategy and competition at the FCA, 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.”
Binary bets are currently regulated by the Gambling Commission but are expected to be brought inside the FCA’s regulatory perimeter following the government’s transposition of Mifid II.
Several other member states of the European Union have already introduced restrictions on the sale of CFD retail products after uncovering similar issues – the French regulator found 90 per cent of investors had lost money.
Following the announcement, RBC Capital Markets analyst Peter Lenardos predicted it would negatively affect the share prices of companies such as IG Group and CMC Markets which provided these services despite the fact they operate “to the highest standards in the industry”.