The UK's derivatives industry has come in for stern criticism from the Financial Conduct Authority (FCA), the UK's financial services watchdog.

The FCA has been reviewing 19 contracts for difference (CFD) providers and distributors. Having completed its review the regulator has sent out a letter to company bosses warning them to act on a number of major concerns raised.

CFDs are derivative products that allow people to trade on live market price movements without owning the underlying assets on which the contract is based.


Among the criticisms are concerns raised about retail investors. The FCA states that most CFD providers are unable to define their target audience. The watchdog also sees a lack of due diligence and limited controls regarding conflicts of interest.

Communication, monitoring and challenges were branded ‘ineffective.' The regulator concludes that ‘consumers may be a serious risk of harm from poor practices’ due to failings to meet its rules.

This is born out by industry data. According to the FCA, 76% of retail customers who bought CFD products lost money, in the year to June 2016.

The FCA has been threatening the CFDs industry with restrictions on products. The watchdog argues that too many ordinary consumers do not understand the process, nor the huge risk to their finances.


Unsurprisingly, the share prices of listed CFD providers are under significant pressure on Wednesday. Investors are becoming increasingly concerned about the threat of heavy regulation crimping financial performance in future, and capping growth.

Shares in CMC Markets (CMCX) fell 4.9% to 149.8p, while IG Group (IGG) dropped 5% to 740p. Plus500 (PLUS:AIM) was also down 4% at £10.87.

The FCA says improvements need to be made across the board.

Investors should also keep an eye on The European Securities and Markets Authority (ESMA), the Europe-wide financial regulator. It is currently in the middle of a public consultation regarding the financial derivative instruments industry.

ESMA is considering measures to prohibit or restrict the marketing, distribution or sale of CFDs to retail clients. It is conducting a public consultation in January 2018 on this matter.


Issue Date: 10 Jan 2018