UK financial regulator has concerns regarding financial spread betting

Britain’s Financial Conduct Authority has expressed “serious concerns” regarding financial spread betting in the CFD (contracts for difference) sector, warning operators to ensure they “pay due regard to the interests of customers and treat them fairly”.

In a statement Wednesday following its review of the sector, the FCA said it had sent a letter to all providers and distributors of these products cautioning them regarding the treatment of clients.

Shares in CMC Markets, IG Group and Plus500 fell by more than 7 percent on the announcement, with IG Group the biggest percentage loser.

“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 said.

The Reuters news agency reports that the sector is regulated by European Union rules which have no caps on leverage. That means investors can take out bets that are far larger than their initial outlay, offering greater potential returns but also running the risk of huge losses.

The European Securities and Markets Authority last month said it was considering restricting the marketing, distribution or sale to retail clients of CFD products.

Among its concerns, the FCA listed the manner in which CFD products were marketed to retail customers; it identified flawed due diligence processes, conflicts of interest and poor remuneration practices. In one case a CFD provider’s arrangements were so poor that the financial watchdog is to take further action.

The majority of retail customers who bought CFD products on either an advisory or discretionary basis lost money, the FCA said after it reviewed 34 firms over a 12 month period.

The FCA advised operators to define their target market precisely; consider how they communicate with clients, and improve due diligence around taking on new distributors.

The regulator said many firms failed to provide satisfactory evidence that they complied with the FCA’s remuneration code, with some paying staff on a 100 percent variable basis. It also said companies were not properly managing conflicts of interest, such as CEOs also managing compliance requirements

The FCA raised similar concerns last year (see previous reports).

The spread betting firms named have not thus far responded to the FCA statement.