There are “areas of serious concern” in the UK’s contracts for differences (CFDs) market, according to the UK’s financial watchdog following its latest review of the sector.
The warning from the Financial Conduct Authority (FCA) sent shares of CFD and spreadbetting companies tumbling.
Shares in CMC Markets, IG Group and Plus500 fell by more than 7% in early morning trading.
The FCA said it had sent a letter to all providers and distributors of these products to retail customers to ensure they “pay due regard to the interests of customers and treat them fairly”.
“We believe there is a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CFDs. As a result, consumers may be at serious risk of harm from poor practices in this sector,” the FCA said.
CFDs let investors speculate on both the direction a share price, currency or other financial product will move, and the extent of the change in price, and there is no stamp duty.
As Reuters reports, the industry is regulated by European Union rules that have no caps on leverage. This means traders can take positions that are far larger than their initial outlay, offering greater potential returns but also running the risk of huge losses.
The European Securities and Markets Authority last month said it was considering restricting the marketing, distribution or sale to retail clients of CFD products.
The FCA has also expressed concerns over the way the products were marketed to retail customers and identified flawed due diligence processes, conflicts of interest and poor remuneration practices.
The majority of retail customers who bought CFD products on either an advisory or discretionary basis lost money, the FCA said in its review of 34 firms over a 12-month period.