UK’s Financial Conduct Authority (FCA) has followed the example of the Cyprus Securities and Exchange Commission (CySEC), issuing a ban on trading bonuses and setting a cap of 1:50 on CFDs.
In its statement the UK regulator commented that CFDs such as those on spread betting and rolling spot forex products are complex financial instruments, which many retail customers do not adequately understand and the FCA found through a survey that 82% of clients lost money on these products.
For this reason the FCA is proposing a package of measures intended to enhance consumer protection by limiting the risks of CFD products and ensuring that customers are better informed.
First off, the FCA suggests the introduction of standardized risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of CFDs.
Secondly, the regulator proposes the setting of a lower cap – 1:25 for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs. For all other retail clients, the leverage must not exceed 1:50. Furthermore, the FCA is introducing lower leverage caps across different assets according to their risks, as currently some brokers offer leverage of over 1:200 to retail clients.
Last but not least, the FCA will be preventing brokers from offering any form of trading or account opening bonuses or benefits to promote CFD products.
“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,” said Christopher Woolard, Executive Director of Strategy and Competition at FCA. “The FCA also has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need.”
According to the FCA, in the past six years it has identified instances of poor conduct across the CFD sector. This includes firms failing to adequately consider if CFDs are appropriate for their customers, failing to provide adequate risk warnings, and firms offering excessive levels of leverage to retail clients. The regulator has also noticed that that binary bets (binary options) are not transparent enough for investors to adequately value them, and have product features which are more akin to gambling products than investments.