FCA proposes stricter rules for contract for difference products

The proposals stem from a number of regulatory concerns about the sector. For example, the U.K. regulator is worried that “more retail customers are opening and trading CFD products that they do not adequately understand,” the FCA says in a news release. In addition, most clients are losing money in this market, it notes, and an FCA analysis of a sample of client accounts found that 82% of clients lost money on CFDs.

Moreover, supervisory work over the past six years has uncovered poor conduct in the CFD sector, the FCA reports, including suitability issues, firms failing to provide adequate risk warnings, and firms offering excessive leverage to retail clients. It also says that these sorts of binary bets “are not transparent enough for investors to adequately value them,” and have features that make them more like gambling than investing.

As a result, the FCA is proposing reforms designed to ensure that clients are better informed, and better protected, when trading in these products. The reforms include imposing leverage limits, enhancing risk disclosure, and limiting certain compensation arrangements.

“We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses. We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products,” says Christopher Woolard, executive director of strategy and competition, FCA, in a statement.

“The FCA also has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need,” he adds.