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Shares in several spread betting brokers have taken a hit following a warning from the Financial Conduct Authority (FCA) that it would investigate the contracts for difference (CFD) market amid ‘serious concern’.
The warning marks another round of bad news for spread betting brokers and CFD providers, after the EU’s plan to ban the sale of binary options to retail clients was announced in December. As a result of this news, shares in spread betting giants IG Group, CMC Markets and Plus500 fell by 3.2%, 3.8% and 4.7% respectively after ending the year positively.
The FCA warning comes as a result of an investigation carried out into the CFD market, assessing 19 firms who distributed the products to retail customers through intermediaries, as well as 15 distributors. During this review, the FCA found that most were ‘unable to offer a satisfactory definition of their target market’ or ‘explain how they align the needs of this group to the CFD product they offered’.
As well as these concerns, the FCA highlighted research which showed the percentage of retail customers who lost money as a result of buying CFD products between July 2015 and June 2016 was as high as 76%.
Among the flaws that the FCA identified in its review was the poor due diligence process taken when providers take on new distributors, as well as the way potential conflicts of interest between the distributors are managed. As a result, providers did not have ‘effective oversight’ into poor conduct and control failings, or the ability to robustly discipline failings, according to the FCA.
IG Group issued a statement, saying it believed that there are ‘no new financial implications for its business’ as a result of the review.
It went on: “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 the European Union.”
Meanwhile, the FCA has called on CFD providers to implement better and more robust due diligence and tests on conflicts of interest, and to better define terms it uses to describe investors such as “experienced”, “sophisticated” and “financially literate”.
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