Regulation  

FCA reveals fears over high-risk investments

FCA reveals fears over high-risk investments

The Financial Conduct Authority has warned firms not to try and get around the new restrictions on selling contracts for difference (CFDs) to retail clients.

Restrictions imposed by the European Securities & Markets Authority (Esma) come into affect across the European Union today (1 August), limiting the sale, marketing and distribution of CFDs.

The FCA stated it fully supports these measures since these products are high-risk and the restrictions will protect retail investors.

But it has warned that other products can create the same kinds of risks as CFDs, particularly when they expose investors to significant leverage.

The FCA stated: "These substitute products could be sold under a variety of labels but share common features with CFDs and these features may cause large trading losses to retail clients.

"We are concerned that firms may consider getting around Esma’s measures by selling other similarly complex products to retail clients.

"We will therefore work with Esma and other European regulators to monitor and assess the sale of these alternative, speculative products to retail clients.

"If we have evidence that these products are causing similar harms, we will work with Esma and will, if necessary, support further action to extend the scope of its intervention."

Last month Esma also imposed an outright ban on selling, marketing or distributing binary options to retail consumers after it found they were making "consistent losses" after investing in these products.

But it is only the distribution of CFDs which has been restricted.

This means providers must issue a standardised risk warning including the percentage of losses on a provider's accounts.

Investors must also be provided with guaranteed limits on their losses and the percentage of margin at which providers have to close out one or more retail clients' open CFDs is standardised.

There are also leverage limits on the opening position by a retail client depending on the volatility of the underlying asset, so the limit is 30:1 for major currency pairs but 2:1 for cryptocurrencies.

Binary options allow an investor to make a bet on the price of value of a stock, commodity, currency, index or anything capable of being measured in financial terms.

CFDs are a contract between an investor and an investment bank or spread-betting firm where, 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.

Analysis across the European Union found that between 74 and 89 per cent of retail accounts trading in CFDs typically lose money, with average losses per client ranging between €1,600 (£1,425) to €29,000 (£25,831).

The FCA had been investigating CFDs after it noticed an increase in the number of firms offering them, including spread bets and rolling spot foreign exchange products, which raised concerns retail investors were trading products they did not understand.

But it decided to hold back from making final rules while Esma considered its own interventions.