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UK's financial watchdog tightens rules for spread betting products
December 6, 2016 / 8:36 AM / a year ago

UK's financial watchdog tightens rules for spread betting products

Dec 6 (Reuters) - Britain’s financial watchdog proposed tougher rules for retail financial spread betting products known as ‘contracts for difference’ (CFD) after finding that 82 percent of customers using them lost money.

"We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses," the Financial Conduct Authority (FCA) said on Tuesday.

CFDs, including spread bets and rolling spot foreign exchange products, are agreements between two parties to exchange the difference between the opening price and closing price of a contract.

Shares in UK’s IG Group, which holds 40 percent of the UK financial spread betting market by number of active primary accounts, fell 22 percent to 611 pence in early trade.

Shares in retail brokerage CMC Markets were down 29.9 percent at 128.17 pence.

Both IG Group and CMC Markets did not immediately comment when contacted by Reuters.

“FCA seems to be imposing more penal rules than the Cypriot regulator last week... This will result in a much smaller less profitable CFD and spread-betting industry,” Liberum analysts wrote in a note.

Cyprus’s financial regulator CySEC last week issued a warning to the mass of retail currency brokers registered on the island over their use of bonus schemes to encourage trading in risky products and related poor treatment of clients.

The FCA said on Tuesday it would introduce stricter rules for CFDs to ensure the sector addresses the shortcomings identified, ensuring that retail clients are aware of the high risks involved in trading these “complex products”.

Some of the proposed measures include standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts to highlight the risks and historical performance of these products and setting lower leverage limits for inexperienced retail clients.

Companies would also have to leverage at a maximum level of 50:1 for all retail clients and regulate leverage caps according to their risks. Firms would not be allowed to give form of trading or account opening bonuses or benefits to promote CFD products, the FCA said. (Reporting by Noor Zainab Hussain in Bengaluru, editing by Louise Heavens)

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