FCA Launches Clampdown on the Contracts for Difference Market 16/19

6th December 2016

Following a year-long consultation, the FCA plans to impose stricter rules regarding the trading of CFD products amongst retail traders. The CFD market has been under the regulatory microscope for quite some time with the UK becoming the latest jurisdiction to propose the enhancement of business standards concerning retail trader protection. The proposal comes after the regulator identified a number of ‘serious concerns’ about the amount of retail clients trading in these speculative and complex products without having an adequate understanding of the risks involved. The UK regulator wants CFD trading platforms to deliver consistent risk warnings, lower leverage limits and stop any account opening promotional bonuses.

The full Consultation Paper can be found here.

The paper proposes the following measures for firms:

  • Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of products
  • 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
  • Capping leverage at a maximum level of 50:1 for all retail clients and introducing lower leverage caps across different assets according to their risks. Some levels of leverage currently offered to retail customers exceed 200:1
  • Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products

The FCA revealed that 97 firms are selling and distributing CFD products to retails clients, with £3.5bn of client money currently being held by those firms. Moreover, in 2016 the number of active retail CFD products in the UK is estimated to be at around 125,000. With these details in mind, the enforcement of the recent proposals will prove to be a disruptive change for firms within the market to deal with.

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