The Financial Conduct Authority has uncovered "areas of serious concern" after carrying out a review of the contracts for difference market.
The regulator recently assessed 19 firms which provide contract for difference (CFD), which are essentially contracts between an investor and an investment bank or a spread-betting firm.
At the end of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including shares or commodities.
The watchdog looked at how intermediaries distribute contracts for difference to retail consumers on either an advised or discretionary basis.
It also evaluated 15 firms which provide them direct to the consumer.
Megan Butler, the regulator's executive director of supervision, has now written to the chief executives of companies which provide and distribute CFD products warning of failings which may cause "significant consumer harm".
She said: "Across the sample, we found the majority of CFD providers and distributors had a poor target market definition.
"Many relied on broad investor descriptions such as ‘experienced’, ‘sophisticated’ and ‘financially literate’, without setting out what these terms actually mean in practice.
"Most firms were also unable to adequately explain how the nature and risks of the CFD product was aligned to their target market."
Ms Butler added that none of the 19 providers were acting in line with the FCA's guidance on communication, oversight and challenge while only one was able to demonstrate robust due diligence when taking on new distributors.
She said: "All distributors in our review had conflict of interest management arrangements that were either ineffective or needed improvement.
"Several firms failed to record a single instance of a conflict of interest affecting their business and a number of others claimed there were no potential conflicts of interest."
In the course of its review, which covered the period July 2015 and June 2016, the FCA also found 76 per cent of retail consumers who bought CFD products on either an advised or discretionary basis lost money.
The European Securities and Markets Authority is currently considering whether to restrict the marketing, distribution and sale of CFDs, which the FCA has said are complex and high-risk.