Three-quarters of retail investors that traded contracts for difference (CFDs) using Irish-based investment and stockbroking firms over the past couple of years lost money as a result, warns a new report from the Central Bank of Ireland.
The Central Bank on Monday warned investors about the risks of trading CFDs, which allow investors to speculate on price movements in a variety of assets, after its review of retail clients who used in CFDs in 2013 and 2014 found that 75% of them lost money. According to the bank, over 39,000 retail clients invested in CFDs during the period, losing an average of €6,900.
The Central Bank has imposed supervisory requirements on firms that it found posed risks to consumers due to compliance issues. It also sent a notice to firms outlining its findings, and providing recommendations for enhancing their compliance arrangements. The compliance issues it found in the review included overestimating clients’ knowledge or experience; and deficiencies in complaint handling and marketing.
“One of our key priorities for 2015 was to examine the sale of investment products which may pose a risk to consumers. One such product is a CFD and, following a themed inspection of the CFD market, we identified several issues in relation to execution-only sales. It is our view that CFDs are unsuitable for investors with a low-risk appetite,” said Bernard Sheridan, director of consumer protection at the central bank, in a statement.
“This is due to the volatile nature of the CFD market, coupled with the potential for a consumer to lose more than the initial investment. Consumers need to be made fully aware of the high-risk and complex nature of CFDs before making investment decisions,” he said.