Shares in UK spread-betting companies have tumbled after the City watchdog found widespread failings that could be putting consumers at serious risk of harm.
The Financial Conduct Authority (FCA) said it “uncovered areas of serious concern” in the contracts for difference market, which is a type of betting on financial products banned in the US, but legal in the UK with a severe health warning. CFDs are a type of high-risk, complex derivative that allow investors to gamble on the price of an asset without owning it.
Shares in London-listed Plus500 fell by almost 5%, CMC Markets was down by nearly 4% in early trading and IG Group lost almost 5%. The intervention follows repeated warnings from European regulators about the risks posed by CFDs and a crackdown on the market.
In a letter to the industry after a year-long review, the City watchdog said it found 76% of consumers had lost money on CFDs between July 2015 and June 2016, and was worried companies were operating outside its rules.
The FCA said it assessed 19 businesses that provide CFDs to companies, which then sell them to consumers, as well as 15 that sell them directly.
Most of them were unable to offer a satisfactory definition of their target market, or why CFDs might be an appropriate bet for them, which the FCA said raised the risk of companies selling CFDs to inappropriate customers.
All distributors in the review had inadequate procedures to manage conflicts of interest, while the FCA found some companies paid their employees solely in bonuses, which raised the risk of mis-selling, as staff come under pressure to achieve sales targets.
The FCA said it uncovered practices so poor at one business that it “intend[ed] to take further action”, although did not name the company or say what it would do.
There has been a rapid growth in spread betting companies looking to cash in on the recent rise of bitcoin, which experts have warned could make losses worse for consumers.
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