Shares in listed CFD providers tumbled as the UK financial regulator warned it had ‘serious concerns’ about the way the high risk investment products are sold to retail punters.
IG Group PLC (LON:IGG) shed 5% to 740p, CMC Markets Plc lost 6.3% to 147.6p (LON:CMCX) and Plus500 (LON:PLUS) fell 5% to 1,077p as the Financial Conduct Authority (FCA) indicated it wanted major improvements in oversight and control arrangements.
Retail investors suffered losses
More than three quarters of retail investors lost money through CFDs in the year to July 2016 and few of the 19 providers it spoke with could define their target market or how CFDs fitted in to this, the FCA said.
CFDs or contracts for difference are financial products that enable people to invest without having to buy the underlying asset. They also give the opportunity for ‘leverage’ of an investment to enable a much higher level of risk and potential reward.
As a result of its letter, several firms have told the FCA they intend to stop providing CFDs to firms that distribute their products on an advisory or discretionary basis.
Others are no longer distributing them to retail consumers, said the regulator while one faces further action due to its poor procedures.
CMC markets generated over 94% of its revenue from CFD and spread betting in the its latest half year, while IG says it is the world’s leading provider of CFDs.
In addition, providers are facing an inquiry from the European Securities and Markets Authority (ESMA) on how to limit the risks to investors from CFDs, which will include measures to restrict their marketing and sale to retail clients.
A public consultation document is expected from ESMA later this month.