FCA fires warning shot at spread betting firms

LONDON (Reuters) - Britain’s financial regulator warned spread betting firms on Tuesday to comply with its rules after a survey found poor practices that risk leaving customers unfairly treated.

The logo of the new Financial Conduct Authority (FCA) is seen at the agency's headquarters in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren

The Financial Conduct Authority published on Tuesday a “Dear CEO” letter sent to firms selling so-called “contracts for difference” (CFDs) such as spread bets and “rolling spot” forex.

The complex, derivative type products allow customers to bet on price moves of an instrument without having to own it. CFDs became popular in Britain as a way of avoiding the stamp duty paid on share transactions.

Such letters from the FCA are often a last chance before enforcement action is taken.

The FCA said it reviewed procedures for taking on new clients who are not given advice when buying CFDs.

The results were poor and showed a high risk that “CFD providers industry-wide” are not meeting requirements and could be failing to do enough to prevent financial crime, FCA director of supervision, Megan Butler, said in the letter.

CFDs can put customers at risk of losing more than their original investment, and firms must assess whether the products are suitable for the client, she said.

The watchdog uncovered a range of approaches to determining if a CFD is appropriate for a particular client, and most of them were not in line with the rules, the FCA said.

Anti-money laundering controls were also insufficient in some cases.

Instead of assessing if a CFD was appropriate, firms were asking customers to tick a box to confirm they understood the risks.

“These findings also suggest that firms may not be acting in the best interests of their clients and treating them fairly,” Butler said in her letter, which includes a copy of the rules the firms must comply with.

“We also saw evidence of poorly worded risk warnings that did not set out the nature and risks of CFD products in a manner that was clear, fair and not misleading,” she added.

Reporting by Huw Jones, editing by Carolyn Cohn and David Evans