FCA Sets Out 'Serious Concerns' With Contracts For Difference After Year-Long Review

The UK's Financial Conduct Authority (FCA) has "serious concerns" over the way in which 'contracts for difference' (CFDs) are being promoted and sold to unsophisticated investors, which it has warned have the potential to cause "significant consumer harm".

Three quarters of retail customers who bought CFD products on either an advised or discretionary basis during a year-long review of the sector by the FCA lost money, the regulator said, in a letter to the chief executives of CFD firms (7-page / 100KB PDF) that it published on its website.

The FCA assessed 19 CFD providers and 15 firms that distribute CFDs to retail investors as part of its review. It found examples of ineffective customer communications, weak conflict of interest management arrangements and problems with the way in which firms identified and categorised clients, as well as "significant room for improvement" in firms' remuneration arrangements.

"Given the significant weaknesses we found across our sample, we believe there is a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CFDs," the FCA said in its letter. "As a result, consumers may be at serious risk of harm from poor practices in this sector."

Several of the firms included in the review have said that they intend to stop distributing the products to retail consumers, or providing the product to those intermediaries that work with retail consumers, the FCA said. It also intends to take "further action" against an unnamed CFD provider whose arrangements were particularly poor.

"It will come as no surprise to many that CFDs continue to be high on the FCA's agenda," said financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com.

"The letter is a stark warning that behaviours identified by the FCA need to be improved. It is likely to continue to review the conduct of the firms written to and, if behaviours do not begin to meet or exceed the FCA's expectations, then supervisory intervention – for example, imposing a skilled person review, a requirement to undertake certain reviews or actions, or a restriction on a firm's ability to undertake certain forms of business – or enforcement investigation become almost inevitable. The future of CFDs and how they are utilised will be dependent on changes which are made as a result of the FCA's review," he said.

CFDs are complex financial instruments offered by investment firms, often...