FCA proposes new protections for consumers betting on 'contracts for differences'

It is consulting on new risk warnings and disclosure requirements for firms offering these products to retail investors, and has proposed banning the use of 'bonuses' to encourage customers to open new accounts. It has also proposed stricter limits on the amount that traders can 'bet' on behalf of retail customers as a multiple of the individual's deposit.

The FCA said that it had "identified instances of poor conduct" across the sector over the past six years, including examples of firms failing to consider whether the products were appropriate for particular customers.

"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," said Christopher Woolard, the FCA's executive director of strategy and competition.

"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," he said.

The FCA is also seeking views on how it should regulate the sale of so-called 'binary bets' to retail investors, on the grounds that these have product features which are "more akin to gambling products than investments", Woolard said.

These products allow individuals to 'bet' on whether the price of a financial instrument will be higher or lower than a fixed threshold at a future point in time. Currently regulated by the Gambling Commission, binary bets will be reclassified as investment products once the recast Markets in Financial Instruments Directive (MiFID II) is fully transposed into UK law.

The FCA's consultation closes on 7 March 2017. It intends to publish a policy statement on any new rules later in the spring, and for those rules to come into force shortly afterwards.

CFDs are complex financial instruments offered by investment firms, often through online platforms; which include the likes of spread bet and rolling spot foreign exchange products. They effectively enable investors to bet on the extent to which the value of an underlying asset, such as equity shares or foreign exchange rates, will rise or fall. For a small deposit, traders will place the bets on behalf of customers at leverage rates of as much as 200:1, which can cause financial detriment if the bet fails.

The FCA is concerned that the availability of CFDs through online trading platforms has led to an increase in unsophisticated investors opening and trading products that they do not understand. As many as 82% of CFD clients lose money, the regulator said. Its most recent review of CFD providers in 2015 found shortcomings in the appropriateness checks conducted by firms, including insufficient risk warnings and anti-money laundering checks.

To address its concerns, the FCA intends to restrict the amount of risk that retail investors can take on with relatively small deposits, particularly for less experienced clients. Those that have been actively trading CFDs for less than a year would only be permitted to bet a maximum of 25 times their deposit, while leverage for more experienced clients would be capped at 50:1. Lower leverage limits would be set for riskier assets, according to the FCA's proposals.

The FCA also intends to introduce standardised risk warnings and mandatory disclosure of profit-loss ratios across all CFDs, so that clients will be able to see the risks and historical performance of the products up front. Providers would also be prevented from using "any form of trading or account opening bonuses or benefits" to promote the products, he said.