Last Chance Saloon For Spread-Betting Firms? 'Dear CEO' Letter About Retail Contracts For Differences (CFD) Products.

Retail CFDs are complex, leveraged derivative financial instruments that investment firms commonly offer to retail clients through online trading platforms. To retail customers, CFDs usually mean spread-betting, but they can also include rolling spot foreign exchange products.

For some years, the FCA has had concerns about poor conduct in CFD firms and the associated risks of consumer detriment and has issued a number of publications containing industry guidance. It is clear that the FCA is troubled by the provision of CFDs, which many regard as little different to gambling, but for experienced investors can form a useful part of a trading strategy.

Following a review carried out into a number of CFD providers and distributors, on 10 January this year, the FCA sent a "Dear CEO" letter to all firms operating in the sector, summarising its findings. Overall, the FCA was disappointed with what it found and has asked firms to consider the issues raised in its letter against their conduct in a number of areas:

Firms should define their target market precisely. However, most firms were unable to offer a satisfactory definition of their target market or to explain how they align the needs of that group to the CFD product offered. In the FCA's view, excessively broad definitions of target markets may lead firms to conclude that CFDs are suitable and/or appropriate for the majority of potential customers, even where this is unlikely to be the case. There were a wide range of communication, monitoring and challenge practices by firms, many of which were ineffective and did not meet expectations. For example product providers did not always share with distributors information about product characteristics, the intended target market and whether the information is intended for the end-customer's use. Indeed, the FCA considered that none of the firms reviewed were acting in line with FCA guidance. The FCA considers that poor customer communication is particularly troubling given that it found that the majority (76%) of retail customers who bought CFD products on either an advisory or discretionary basis lost money over the 12 month period under review. Most providers had flawed on-boarding due diligence processes when taking on new distributors. Firms did not take steps to understand whether an intermediary has the necessary knowledge and experience to distribute the product and whether the distributor's target market matches that of the product...