The Financial Conduct Authority said CFDs like spread bets and rolling spot foreign exchange products are complex financial instruments offered by investment firms, often through online platforms, to customers who may not really know what they're buying into.
Following an increase in the number of firms in the CFD market, the FCA said it has concerns more retail customers are opening and trading CFD products they do not adequately understand. For example, the FCA’s analysis found 82 per cent of clients lost money on these products.
The measures the watchdog is proposing are intended to limit the risks of CFD products and make sure customers are better informed.
The proposals include introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers, and setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1.
The FCA also wants to prevent providers from enticing new customers with "any form of trading or account opening bonuses or benefits" used to promote CFD products.
“We have serious concerns 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, executive director of strategy and competition at the regulator.
"We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure retail clients are aware of the high risks involved in trading these complex products.
“The FCA also has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need.”
Shares in spreadbetting firms tumbled at the open after the FCA's announcement.
In the past, the financial regulator upheld a number of complaints surrounding transaction charges on CFD products.