Poor compliance, management failings, and risks of mis-selling are among the critical concerns
After reviewing the market for contracts-for-difference (CFDs), the UK’s financial regulator issued a warning to companies that provide and distribute the risky investment products to retail investors.
In a new statement, the Financial Conduct Authority (FCA) said a review of companies offering CFDs had “uncovered areas of serious concern.” Over a 12-month period, the regulator evaluated 34 firms and found they had flawed due-diligence processes, could not properly define their target market, and did not properly manage conflicts of interest, reported the Financial Times.
The regulator told CFD companies to improve “a number of oversight and control arrangements.” In particular, it noted the lack of adequate procedures to assess the degree of experience investors had, causing products to be marketed to unsuitable customers.
In one firm, the FCA found that the CEO was also acting as the head of compliance. Some other firms were also found to have employees paid on a 100% variable basis, which “increased the risk of mis-selling since staff may feel pressured to achieve maximum sales targets.”
The FCA also found that around 76% of retail investors lost money on the products. Many companies offering CFDs allow people to leverage their bets; in some cases, customers are allowed to borrow several hundred times the amount they have deposited.
“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 watchdog said. While it had zeroed in on companies that offered the products on an “advisory or discretionary basis,” the FCA told the Times it wanted “all firms who provide CFDs to take note of our findings.”
According to Mick McAteer, a former FCA member and director of the Financial Inclusion Centre, CFDs were “just the latest type of complex products that make a lot of claims but rarely deliver” — something he chalked up to a lack of understanding by both intermediaries and investors.
“At the core of these things is always the problem that product manufacturers are not doing enough to explain to intermediaries and end investors the complexities of these products and the risks,” McAteer said.
Related stories:
Regulators impose ban on binary options
Advisory panel urges caution on OTC derivatives
In a new statement, the Financial Conduct Authority (FCA) said a review of companies offering CFDs had “uncovered areas of serious concern.” Over a 12-month period, the regulator evaluated 34 firms and found they had flawed due-diligence processes, could not properly define their target market, and did not properly manage conflicts of interest, reported the Financial Times.
The regulator told CFD companies to improve “a number of oversight and control arrangements.” In particular, it noted the lack of adequate procedures to assess the degree of experience investors had, causing products to be marketed to unsuitable customers.
In one firm, the FCA found that the CEO was also acting as the head of compliance. Some other firms were also found to have employees paid on a 100% variable basis, which “increased the risk of mis-selling since staff may feel pressured to achieve maximum sales targets.”
The FCA also found that around 76% of retail investors lost money on the products. Many companies offering CFDs allow people to leverage their bets; in some cases, customers are allowed to borrow several hundred times the amount they have deposited.
“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 watchdog said. While it had zeroed in on companies that offered the products on an “advisory or discretionary basis,” the FCA told the Times it wanted “all firms who provide CFDs to take note of our findings.”
According to Mick McAteer, a former FCA member and director of the Financial Inclusion Centre, CFDs were “just the latest type of complex products that make a lot of claims but rarely deliver” — something he chalked up to a lack of understanding by both intermediaries and investors.
“At the core of these things is always the problem that product manufacturers are not doing enough to explain to intermediaries and end investors the complexities of these products and the risks,” McAteer said.
Related stories:
Regulators impose ban on binary options
Advisory panel urges caution on OTC derivatives
