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FCA warns of failings in firms providing CFDs to retail investors

By Oliver Haill

Date: Wednesday 10 Jan 2018

FCA warns of failings in firms providing CFDs to retail investors

(ShareCast News) - City brokers providing contracts for difference (CFDs) to retail investors are causing "serious concern" at the UK financial regulator, which wrote to 19 providers with a warning about their conduct.
The Financial Conduct Authority said it found "significant weaknesses" in its assessment of 19 CFD providers and saw a "high risk" that firms are not meeting its rules and expectations in providing and distributing CFDs, which indicated a "serious risk of harm" for consumers.

One CFD provider's arrangements were so poor that the regulator intend to take further action, while at all the distributor firms there were weaknesses identified in managing conflicts of interest.

Noting that 76% of retail customers who bought CFD products on either an advisory or discretionary basis lost money over the 12 month period under review, the FCA said it was particularly concerned with providers' lack of effective communication and challenge. Most providers also had "flawed" due diligence processes for taking on new distributors.

For all but one firm, the FCA will not yet take any action but called for all to review their practices to ensure they confirm to the rules and guidelines.

As it continues to monitor the CFD market, the regulator may bring some providers in for a follow-up review, with any rule breaches resulting in action that could include appointing investigators to examine specific firms, individuals or practices.

Shares in IG, CMC Markets and Plus500 were all down on the news on Wednesday morning.

The FCA's letter follows the proposals from European Securities and Markets Authority in December to use its powers of intervention to place a range of new restrictions on CFD trading. ESMA said it was reviewing includes setting leverage limits on the opening of a position between 30:1 and 5:1, with limits to vary according to the volatility of the underlying asset.

Under the ESMA proposals, CFDs will also have a margin close-out rule, a negative balance protection to provide a guaranteed limit on client losses, a restriction on benefits incentivising trading and be marketed with a standardised risk warning.


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