The UK financial market regulator, the Financial Conduct Authority, has aired its concerns about the issues and the poor practices that are facing service providers of contracts for difference (CFDs) in the retail sector. The regulator noted that these products carry a high level of risk and could lead to losses.

FCA concerned about poor practices by retail CFDs providers

The FCA has sent a letter to all the retail brokerage platforms licensed to operate in the UK. The letter titled “Dear Chief Executive” reminds these brokers that CFDs are high-risk financial instruments and can result in significant losses to the consumer.

The FCA noted that it was taking measures to reduce these risks, but around 80% of the market participants were making losses. Some brokers have also failed to comply with the set regulations.

The FCA has also published a press release saying that the regulatory body had halted the marketing efforts of 24 firms promoting CFDs in the last two years. However, the regulator noted that the “poor practices” detected were exclusive to a few companies, especially those that provided services to UK residents from overseas locations.

The FCA has also pointed to misleading advertising made by some firms. Some firms engaged celebrities, adopted aggressive sales tactics, and offered investment advice without authorization.

Some dishonest companies have also aggressively persuaded customers to make large deposits into their trading accounts. These deposits were mainly beyond the financial capacity of the traders and were not within their risk levels.

The Executive Director of Markets at the FCA, Sarah Pritchard, said that the regulator had provided standards by which it expected all CFD companies to abide to promote consumer protection and enhance market integrity.

“CFD providers authorized 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,” Pritchard said.

The FCA has also added that all companies that received the letter must take the necessary measures and address the concerns highlighted therein by January next year.

Focus on the CFD sector

The increased focus of the FCA in the CFD sector is part of the Consumer Investments strategy. The regulator devised a plan in mid-September to have a consumer investment market where trading can be done after understanding the risks involved.

This plan was announced in September this year, and it plans to create a market revolving around consumers. This market will support trades where consumers can understand the relevant risks while the regulator provides protection.

The FCA has also halted the operations of 33 consumer investment companies, saving investors from multi-million dollar losses. The regulator also wanted trading app developers, saying they needed to take another approach to design these apps to lower incentives that could result in excess trading.