Spreadbetters shrug off FCA claims customers are at "serious risk of harm"

 
Oliver Gill
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The FCA wrote to the chief executives of CFD firms to inform them of its findings

Britain’s biggest spreadbetting firms today shrugged off a damning assessment of the contracts for differences (CFD) sector by the City’s top financial watchdog.

In a letter to the spreadbetting chief executives, the Financial Conduct Authority (FCA) uncovered "flawed" processes, "significant weaknesses" and conflicts of interest.

Consumers are at "serious risk of harm from poor practices in this sector", the FCA said.

Shares IG Group, CMC Markets and Plus500 fell between two and five per cent, a far cry from the sector-wide plunge that followed the announcement of a regulatory crackdown just over a year ago.

IG, the largest of the listed trio, welcomed the FCA review.

“We believe that stricter supervision of those firms who do not comply will lead to improved client outcomes in the industry,” IG said.

CMC insisted the FCA findings will not “have any additional financial impact on the group.”

Meanwhile, Plus500 added: “The guidance contained in the letter is not directly applicable to its business model.”

Read more: Small spreadbetters "will suffer" from regulation says CMC Markets boss

Lost money

The FCA review found between July 2015 and July 2016 more than three-quarters (76 per cent) of retail customers lost money using CFDs.

The watchdog said: "You should consider whether your firm complies with the FCA’s requirements when providing or distributing CFDs to retail customers on an advisory or discretionary basis.

Following our feedback to them, several firms have said they intend to stop providing CFDs to firms that distribute this product on an advisory or discretionary basis.

Others are no longer distributing this complex, high-risk product on these bases to retail consumers. This review also identified a CFD provider whose arrangements were so poor that we intend to take further action.

Read more: Bye-bye binaries: Europe-wide ban of popular trading product

Shares in spread betting firms plummeted by a third at the end of 2016 when the FCA announced plans to clamp down on the sector. The plans, initially put on ice, were passed over to European authorities in the second half of 2017 to enable a Europe-wide implementation.

In the meantime, UK listed spreadbetters thrived in 2017. The major UK listed players – IG Group, CMC Markets and Plus500 – all posted bumper share rises as sales prospered.

However, a European Securities and Markets Authority (ESMA) crackdown hangs over the heads of the firms with a consultation currently being undertaken.

Update

An update at the end of December indicated ESMA's plans were even more stringent than those proposed by the FCA a year beforehand. They drew criticism from IG Group, the largest spread betting firm in the UK, with more muted responses from Plus500 and CMC Markets – the latter of which has previously indicated a crackdown on the sector will ultimately be beneficial.

Pinsent Masons senior financial services enforcement lawyer Michael Ruck said today’s review will “come as no surprise to many that CFDs continue to be high on the FCA’s agenda”.

The FCA’s view on CFDs is clear from previous publications and statements, and it is not a positive view.

He added: “In particular, marketing of CFDs to the appropriate target market, due diligence processes and conflicts of interest are all key areas firms should be focussing as these have been identified in the most recent letter as areas of significant concern for the FCA.”

Read more: Spreadbetters' shares are down as much as 15pc: Here's why

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