CITY watchdog the Financial Conduct Authority (FCA) is tightening up the rules on spread betting and rolling spot foreign exchange (forex) products, forms of trading which can net rapid and huge profits – or losses.
They fall under the heading of contract for difference (CFD) products – complex financial instruments offered by investment firms, frequently through online platforms.
The FCA said it wanted to improve standards across the sector and ensure that customers were better protected.
Spread betting allows users to trade on the price movements of thousands of financial markets including indices, shares, currencies and commodities.
Spread bets can be used to speculate on price movements irrespective of whether the markets are rising or falling. Rolling spot forex products perform a similar function in currency exchange markets.
The FCA said its action followed a rise in the number of firms in the CFD market and its concerns that more retail customers were opening and trading CFD products they did not fully understand. Its analysis of client accounts for CFD firms found that 82 per cent of customers lost money on these products.
The watchdog’s new measures are intended to limit risks and ensure that customers are better informed.
They include the introduction of standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers, along with setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs.
The maximum ratio for such customers will be 25:1, while it will be capped at 50:1 for all retail clients, some of whom are offered a level of more than 200:1.
Product providers will not be allowed to use any form of trading or account opening bonuses or benefits to promote CFD products.
The FCA is also setting out its vision on a range of policy measures for binary bets that would complement existing conduct of business rules, once these products are brought into its regulatory scope.
Christopher Woolard, FCA executive director of strategy and competition said: “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.
“The FCA also has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need.”
The watchdog said its supervision work over the last six years had identified instances of “poor conduct” across the CFD sector, including the failure of firms to properly consider if they were the right products for customers, failing to give adequate risk warnings and offering excessive leverage levels to retail clients.
It has also said that binary bets are not transparent enough for investors to adequately value them, and have product features more akin to gambling products than investments.
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