CFDs once again under the regulatory microscope as FCA follows ASIC’s lead in tightening rules on leverage

“The Financial Conduct Authority (FCA) is today proposing stricter rules for firms selling ‘contract for difference’ (CFD) products to retail customers to improve standards across the sector and ensure consumers are appropriately protected.” – Financial Conduct Authority.

regulation

During the final quarter of 2015, Australia’s regulatory authority for non-bank financial markets, ASIC, began considering a ban on contracts for difference (CFD) products within its jurisdiction.

At that time, FinanceFeeds took a close look at the rationale behind this, noting that many commentators at the time had considered that CFDs have had a tumultuous run over the last 7 years, starting with the global financial crisis, as trading conditions became a lot more volatile.

Just over one year ago, an article published in the Financial Review by Patrick Durkin, highlighted that ASIC may be granted new powers by the government to put products like Contract for Difference (CFDs) under review.

Mr Durkin noted ‘Margin loans, contracts for difference and bank warrants could be curtailed or banned under far-reaching new powers to be granted to the corporate regulator by the government in response to the Financial System Inquiry.’

Given the leveraged nature of CFD trading, retail traders with little experience of money management, stop loss strategies and trading on leverage, have always been a potential black spot.

Depending on which CFD broker, it was considered that traders may get access to 100 times leverage on their trading account, which means a $1,000 trading account could access a total position size up to $100,000 in value, thus the general consensus at the time was that a retail trader who lacks the require experience or discipline is going to run into trouble pretty quickly.

Many senior executives in the industry have met personally with ASIC Chairman Greg Medcraft in CFD Forum meetings and at industry events, deducing that it is clear that Mr. Medcalf is not an advocate of retail traders getting access to highly leveraged, derivative products, thus he has often made it clear the CFD industry needs to self-regulate, and take matters under their own control.

Today, the Financial Conduct Authority (FCA) in London has begun to take a similar view.

FinanceFeeds has obtained a statement on the new stance that the FCA has now taken with regard to CFDs, which is of great importance as the FCA presides over a market in which CFDs are prevalent compared to spot FX due to the tax treatment of retail trading by the British government.

The statement from the FCA explains “The Financial Conduct Authority (FCA) is today proposing stricter rules for firms selling ‘contract for difference’ (CFD) products to retail customers to improve standards across the sector and ensure consumers are appropriately protected.”

“Contracts for differences, such as spread bets and rolling spot foreign exchange products, are complex financial instruments offered by investment firms, often through online platforms. Following an increase in the number of firms in the CFD market, the FCA has concerns that more retail customers are opening and trading CFD products that they do not adequately understand. The FCA’s analysis of a representative sample of client accounts for CFD firms found that 82% of clients lost money on these products. The FCA is therefore proposing a package of measures intended to enhance consumer protection by limiting the risks of CFD products and ensuring that customers are better informed.”

Industry comment on this matter has been substantial this morning across London, with Richard Fletcher of The Times having detailed the matter comprehensively, as well as noting the FCA’s concerns.

According to his perspective, the FCA has concluded that spread-betting firms have “failed to adequately consider if CFDs are appropriate for their customers, failed to provide adequate risk warnings and offered excessive levels of leverage to retail clients”.

That is the damning verdict of the British regulator which believes that 82 per cent of spread-betting clients lose money and has proposed stricter rules this morning, including mandatory disclosure of profit-loss ratios on client accounts to better illustrate the risks and historical performance of product, as well as lower leverage limits for inexperienced retail clients and capping leverage at a maximum level of 50:1 for all retail clients

“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,” says Christopher Woolard, executive director of strategy and competition at the FCA.

Read this next

Market News

Stock Market Analysis: Is NVDA Losing Its Leadership?

Since the beginning of the week, the S&P 500 Index (US500) has seen a modest increase of about 0.58%, whereas NVDA’s share price has experienced a decline of approximately 3.8%. This recent divergence raises concerns among Nvidia stock investors — could it signify a loss of NVDA’s market leadership?

Industry News

ESG: Australian regulator wins first greenwashing court case against Vanguard

Vanguard admitted that a notable portion of the securities within both the Index and the Fund did not undergo the promised ESG scrutiny.

Fintech, Uncategorized

BitMEX integrates HALO from Solidus Labs for cross-market surveillance

““The recent approval of the Spot Bitcoin ETF has piqued the market’s interest. As a result of price volatility, the trading volumes for crypto derivatives have gone up substantially. HALO, with its advanced technology and crypto-native detection architecture, will enable BitMEX to smoothly and safely scale trade surveillance across its increased trading volumes and provide the necessary safeguards for new product launches.”

Industry News

Horizon Software rebrands to Horizon Trading Solutions

“Horizon Trading Solutions has seen accelerated global growth over the past year to meet the rising demand for our trading solutions and built-for-purpose technology offering. The choice to rebrand represents a key part of this development, while maintaining our heritage and history in the industry.”

Market News

USDJPY has surged to levels last witnessed in 2022. Should we consider opening a short position?

The recent resurgence of the US dollar has propelled USD/JPY to new heights, touching levels not seen since 2022. This surge comes against the backdrop of stable short-term yields and ongoing economic data that fails to signal a significant slowdown, prompting questions about the extent of current monetary easing measures.

Digital Assets

DED Trends on Twitter After Memecoin Snapshot Announcement

Polkadot-backed community coin #DED, made it to the trending charts on X, demonstrating community’s engagement and interest behind the memecoin. 

Digital Assets

BlockDAG Presale Nears $10 Million Amid Toncoin’s Momentum, Green Bitcoin’s Presale, and the Rise of Other Top Cryptos

This article will examine three top trending topics: Toncoin’s potential, Green Bitcoin’s innovative presale, and BlockDAG’s sustainable mining approach. These cryptocurrencies take centre stage for their uniqueness and innovation.

Digital Assets

Coinbase scores minor victory vs SEC, but lawsuit to proceed

A federal judge in Manhattan, U.S. District Judge Katherine Polk Failla, ruled on Wednesday that the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Coinbase can largely proceed.

Web3

COTI Teams Up with Civic for Enhanced Digital Identity Control

СOTI and Civic are teaming up to enhance digital identity security in Web3, aiming to provide users with more control over their digital selves through innovative technology.

<