FCA Warns Brokers against CFDs 'Poor Practices'

The Financial Conduct Authority (FCA), Great Britain's financial market watchdog, has highlighted its continued concerns regarding problems and 'poor practices' that service providers in the contracts for difference (CFDs) retail industry are facing.

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In a 'Dear CEO' letter sent today to retail brokers licensed in the UK, the institution reminds CFDs are high-risk products that can lead to substantial consumer losses. Although the FCA is taking steps to reduce the risk, about 80% of the market participants are losing money, and some brokers are still not complying with the set guidelines.

According to the accompanying press release, the FCA's action stopped 24 firms from marketing CFDs in the UK in the last two years. Activities undertaken in the previous year alone prevented £100 million in financial harm.

The FCA notes that 'poor practices' refers to only a small percentage of firms, especially those offering their services to the UK from overseas. In the worst cases, the regulator has identified instances of false advertising involving celebrities, aggressive sales tactics and investment advice offerings without proper authorization. Dishonest operating companies try to force consumers to deposit large sums of money, often beyond their financial capacity and level of risk aversion.

“We have set out the standards we expect CFD firms to demonstrate in order to protect consumers and ensure market integrity. CFD providers authorised in our regime must sell products appropriately, and when the new consumer duty comes into effect, will need to ensure that products deliver good outcomes for retail consumers. We will not hesitate to take swift and assertive action where we identify harm,” Sarah Pritchard, the Executive Director of Markets at the FCA, commented.

The FCA expects all companies which received the letter to take appropriate action on the concerns raised by January 2023.

Ongoing Focus on the CFD Sector

The FCA's increased activity in the CFD sector stems from the wider Consumer Investments strategy. The triyearly plan was published in mid-September and aims to create a consumer investment market in which trading can be made with an understanding of the risks involved, with access to the regulator's protection and confidence.

In October, the regulator published data on consumer harm from 1 April 2021 to 31 March 2022. As part of its ongoing efforts, the FCA stopped 33 consumer investment firms and saved traders from multimillion-dollar losses.

Last week, the FCA drew attention to excessive gamification in the retail investment industry. It issued a warning to trading app developers, saying they need to take a different approach to app design and reduce incentives that can lead to excessive trading.