Spread-bet­ting firms must fol­low the rules

Yorkshire Post - Business - - BUSINESS -

BRI­TAIN’S FI­NAN­CIAL watch­dog has sent a warn­ing let­ter to spread-bet­ting firms, say­ing con­sumers are “at se­ri­ous risk of harm” as a re­sult of poor in­dus­try prac­tices af­ter find­ing the ma­jor­ity of cus­tomers lost money through their trades.

It fol­lows a re­view by the Fi­nan­cial Con­duct Au­thor­ity (FCA) into the in­dus­try’s use of con­tracts for dif­fer­ence (CFD), re­fer­ring to a type of de­riv­a­tive prod­uct that sees in­vestors spec­u­late on whether the move­ment of the stock will fall be­low or rise above the re­spec­tive bid and of­fer prices quoted by the spread-bet­ting firm.

“The re­view un­cov­ered ar­eas of se­ri­ous con­cern that we want to high­light to firms across the in­dus­try,” the FCA said in its let­ter to chief ex­ec­u­tives.

The reg­u­la­tor said it dis­cov­ered that 76 per cent of re­tail cus­tomers who bought CFD prod­ucts in the pe­riod cov­ered by the re­view, July 2015 to June 2016, lost money as a re­sult.

The providers of CFDs, which the FCA de­scribed as “com­plex, high risk in­stru­ments”, were also found to have “weak” con­flict of in­ter­est con­trols, as well as “in­ef­fec­tive” com­mu­ni­ca­tion, mon­i­tor­ing and chal­lenge prac­tices that fell short of ex­pec­ta­tions at some firms.

That is on top of “flawed” due dili­gence pro­cesses when tak­ing on new dis­trib­u­tors of CFDs.

The FCA stressed that, in light of the high level of risk in­volved with CFDs, it was crit­i­cal that firms com­ply with its rules.

“Given the sig­nif­i­cant weak­nesses we found across our sam­ple, we be­lieve there is a high risk that firms across the sec­tor are not meet­ing our rules and ex­pec­ta­tions when pro­vid­ing and dis­tribut­ing CFDs. As a re­sult, con­sumers may be at se­ri­ous risk of harm from poor prac­tices in this sec­tor,” the FCA warned.

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