Spread betting shares fall after FCA warns consumers 'may be at serious risk of harm'

The City watchdog has warned UK spreadbetting firms that they are putting amateur investors "at serious risk of harm" after finding examples of flouting rules, poor due diligence and conflicts of interest. 
A year-long review by the Financial Conduct Authority (FCA) into so-called contracts for difference (CfD) providers has found that 76pc of retail investors who bought the complex derivatives between July 2015 and June 2016 lost money. 
CfDs allow investors to bet on movements in financial markets, including shares and currencies, without buying the underlying asset. While this means they can bet without the stamp duty they are often highly leveraged, meaning investors can gain or lose far more than they originally put in. 
The watchdog said in a letter to industry bosses that it had "serious concerns" about the sector, sending shares in Britain's major CfD players IG Group, CMC Markets and Plus500 falling. Plus500’s shares were down 5.5pc to ?10.71, while IG Group dropped 4.4pc to 745p and CMC Markets fell 2.4pc to 154p.  
In its letter, the FCA pointed to a raft of problems across the sector including conflict of interest, with one firm having a chief executive who was also head of compliance, as well as issues spanning pay practices, flaws in due diligence and ineffective communication. 
"Most providers and distributors in our review were unable to offer a satisfactory definition of their target market," the regulator added. 
Spread betting shares fall after FCA warns consumers 'may be at serious risk of harm'

The FCA issued a damning verdict of the spread betting sector on Wednesday

Jonathan Goldberg
Its damning verdict comes just before the European Securities and Markets Authority (Esma) is expected to unveil a swathe of strict new rules for the sector. It is considering banning the sale of so-called binary options, which involve making bets in a very short period of time, and restricting the amount investors can lose. 
"Given the significant weaknesses we found across our sample, we believe there is a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CfDs," the FCA said on Wednesday. "As a result, consumers may be at serious risk of harm from poor practices in this sector." 
It said that the performance of one CfD provider was "so poor" that it intends to take further action. 
The FCA stopped its own investigation into how CfDs could be better regulated last summer, so that it could instead work with Esma on its crackdown. The European markets watchdog is set to announce its final plans, set to be tougher than originally anticipated, later this month.  
IG, CMC and Plus500 have all insisted in the past that they will be less impacted by the EU-wide rule changes compared to their smaller rivals, in part because they target richer, more professional clients. CMC, for example, currently has an initiative in place named "Project Tuna" aimed at attracting this client base. 
Responding to the watchdog's letter, CMC said it had already taken "positive steps" to address the points raised while Plus500 and IG said they do not offer retail customers CfDs on either an advisory or discretionary portfolio management basis. 
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