Spread-betting firms must follow the rules
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.