Shares in the UK's leading spread betting and contract-for-difference (CFD) providers fell in London Wednesday following a review of the sector by the Financial Conduct Authority (FCA) which uncovered "areas of serious concern" across the market.
The review looked at where firms offer the high-risk instruments to retail customers and assessed both the conduct of firms which provide the CFD service and the organisations that distribute the product and deal with the end consumer.
Focused on the processes, policies, controls and oversight arrangements at same companies, the review assessed 19 providers of CFDs to intermediaries which then distribute CFDs to retail consumers, and also evaluated 15 firms that distribute CFDs to retail investors.
The FCA said it wanted to ensure that companies deliver CFD products to the intended target market, and pay due regard to the interests of customers and treat them fairly.
Among other things, the review looked at how companies identified target markets and their ability to explain how the CFD product was aligned to this group’s needs, as well as providers' processes for taking on new distributors, and how effectively providers communicate, monitor and provide the relevant degree of challenge over how distributors sell the product.
The FCA said that the review had uncovered "areas of serious concern" that the association wanted to highlight to the industry, noting that most providers and distributors were unable to offer a satisfactory definition of their target market or to explain how they align the needs of this group to the CFD product they offered.
“Given the level of risk of these products, it is important firms comply with our rules,” said the FCA. "We note that the majority (76 per cent) of retail customers who bought CFD products on either an advisory or discretionary basis lost money over the 12 month period under review (July 2015 to June 2016)."
The review also revealed a wide range of communication, monitoring and challenge practices by providers over their distributors, many of which were ineffective and did not meet our expectations.
Most sample providers had flawed due diligence processes for taking on new distributors, while the FC identified weaknesses in the conflict of interest management arrangements at all the distributors it assessed.
The findings suggested that CFD providers and distributors may be failing to conduct their activities in accordance with the FCA's Principles for Businesses, the client’s best interests rule (Conduct of Business Sourcebook 2.1.1R) and Senior management arrangements, systems and controls (SYSC).
"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," said the FCA in a letter to CFD providers and distributors dated Wednesday. "As a result, consumers may be at serious risk of harm from poor practices in this sector.
"In particular, firms need to improve a number of oversight and control arrangements to reach standards we would consider adequate, given the relevant rules and guidance mentioned throughout this letter. We are concerned that if firms do not address these poor practices, there is a greater risk that consumers will experience poor outcomes through the provision and distribution of CFDs."
Following its feedback, the UK financial watchdog said that several companies have said they intend to stop providing CFDs to companies that distribute CFDs on an advisory or discretionary basis. Others are no longer distributing the product on these bases to retail consumers.
The review also identified one CFD provider whose arrangements were so poor that the FCA intends to take further action.
"The provision and distribution of CFD products and delivering good customer outcomes in this sector will remain areas of focus for us," said the FCA. "We will undertake further work on these topics and may ask you to take part in a follow-up review to assess how firms have responded to this feedback.
"Where we identify breaches of our rules, we will take appropriate action, including appointing investigators to examine specific firms, individuals or practices."
In a statement, IG Group welcomed the FCA's review on the provision and distribution of CFD products to clients on an advisory or discretionary basis.
"IG does not offer advisory or discretionary services for CFD products and has terminated its very small number of relationships with distributors who offer our CFD product on a discretionary or advisory basis to retail clients within the UK and EU," said the company. "IG believes that it complies with the applicable rules and FCA guidance and that this review has no new financial implications for IG's business."
Shares in IG Group Holdings plc (LSE:IGG) were trading down 2.95 per cent at 756.00 pence per share in London earlier Wednesday, while shares in CMC Markets plc (LSE:CMC) fell by 3.81 per cent to 151.60 pence. Plus500 Ltd shares (LSE:PLUS) were down 4.77 per cent at 1,079.00 pence per share, below its 52-week high of 1,220.00p set last week.