UK FCA proposes tighter rules for CFD products

6 December 2016

The UK’s Financial Conduct Authority (FCA) has today (Tuesday) proposed a new set of rules for firms selling contract for difference (CFD) products to retail customers in an effort to improve standards across the sector.

The national regulator said that following an increase in the number of firms in the CFD market, which includes spread bets and rolling spot foreign exchange, it has concerns more retail customers are opening and trading CFD products they do not properly understand.

The proposed measures include introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to illustrate the risks and historical performance of such products, as well as 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.

Other possible rules are for leverage to be capped at a maximum level of 50:1 for all retail clients and lower leverage caps across different assets according to their risks, with providers to be prevented from using any form of trading or account opening bonuses or benefits to promote CFD products.

In addition, the FCA will set out its vision on various policy measures for binary bets that would complement existing conduct of business rules, once products are brought into its own regulatory scope.

Christopher Woolard, executive director of strategy and competition for the FCA, said: “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.

“We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that 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.”

The move comes after the Cyprus Securities and Exchange Commission last week announced a host of new regulations for companies that offer CFDs and other speculative products such as binary options.

Related article: CySEC outlines new leverage, bonus regulations