FCA claims its interventions have tackled harm in CFD market

The UK Financial Conduct Authority (FCA) has today published its annual Sector Views, a report that assesses the risks and potential harm to consumers across financial services markets.

The report stresses the remaining concern regarding high-risk investment products but the regulator notes that its interventions have tackled harm in the contracts for difference (CFD) market.

The FCA has intervened to address harm in the retail CFD sector by restricting how firms market, distribute and sell these products to retail consumers. Let’s recall that these restrictions limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides. The measures also introduced closeout to a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account.

Before the interventions (that is, the ESMA intervention that applied in the UK too beginning the summer of 2018, and the national measures the FCA introduced), there were an estimated 800,000 active client accounts holding a total of £1.5 billion in client money. The FCA estimated that, overall, retail clients lost £1.07 billion per year trading these products. Following the introduction of leverage limits and other investor protection measures, total losses for retail clients of UK firms reduced by £77 million between August and October 2018 alone.

The FCA estimates that its final rules will save retail consumers between £267 million and £451 million overall per year.

The regulator notes, however, that retail consumers are still at risk, and should be alert, as some CFD firms are encouraging retail clients to opt up to ‘elective professional status’ or contract with affiliated third country firms to circumvent the leverage restrictions introduced by the FCA.

High-risk retail investment products are exposing consumers to more risk than they can absorb – some of the highest risk products are often marketed directly to retail consumers with poor communication of the risks involved and implications that the investments are regulated, when this is not the case.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA and interim Chief Executive designate, said:

‘What is clearly apparent from the Sector Views, is that many of the harms we are seeing are created by a significant number of smaller firms we regulate or firms beyond our remit”.

Regarding investments in cryptoassets, the FCA estimates that, as of December 2019, fewer than 15 cryptoasset spot exchanges were headquartered in the UK, out of a global market of over 250. The FCA analysis suggests that these exchanges account for less than 5% of trading in this market. The regulator has warned of the risks of purchasing unregulated cryptoassets.