The UK Financial Conduct Authority (FCA) yesterday published its Perimeter Report, arguing for legislative changes.
The report highlights a number of issues around the marketing of contracts for difference (CFDs) and other high-risk investment products to retail clients. Particular concerns the FCA has identified include firms encouraging clients to trade with entities in third country jurisdictions rather than their UK business, and the use of introducers and affiliates who may be carrying out unregulated activities.
The FCA says:
“We are aware that some providers of retail derivatives (CFD and Futures) are encouraging retail clients to trade with firms in third country jurisdictions, by using comparison tables to highlight that retail consumers can get higher leverage through third country intra-group entities”.
Some firms have also failed to highlight the protections that retail consumers may lose by transferring their account, such as the loss of negative balance protections. This could also be part of a longer-term trend as firms become more global and deliver services predominantly via online platforms and mobile apps.
CFDs and other complex leveraged derivatives are increasingly marketed through social media, with the use of Instagram and messaging platforms such as Telegram to encourage people to trade high risk products. This is exacerbated by firms‘ use of introducers and affiliates including unregulated ’educators‘ and ’influencers with the promise of positive returns on investments and promoting the potential to achieve a celebrity-like lifestyle by trading.
The regulator has found that educators and influencers often use images of holidays and expensive cars to promote the trading of CFDs and the returns that can be made. This conflicts with the standardised risk warnings that are in place for CFD providers, which show the majority of clients will lose money. Recent evidence suggests that this is leading to firms taking on younger consumers for whom the product may not be appropriate.
“We have intervened, and will continue to do so, when firms use language that does not properly present the risks of trading on higher leverage. We will continue to focus on firms financial promotions and marketing activities on both of these issues in our supervision work,” the FCA says.
The report recommends that duties on internet companies in the Online Safety Bill should extend to paid-for advertising, as well as user-generated content. The FCA also believes that the Bill should designate content relating to fraud offences as ‘priority’ illegal content and so require monitoring and preventative action by platforms.
The FCA has also called again for amendments to the Financial Promotions Order. Current exemptions to the order mean more ordinary investors are at risk of receiving financial promotions, including for high-risk products, that don‘t have to comply with the FCA’s rules.
Nikhil Rathi, Chief Executive of the FCA, said:
‘The annual perimeter report is an important part of our accountability to Parliament, particularly the Treasury Committee. The FCA is committed to being more innovative, assertive and adaptive. That means being more proactive at the limits of our regulation, working with partners and other agencies where we don’t have powers and setting out where we believe more powers are necessary.
‘We see real risks to consumers from outside our remit from both online advertising and from those using exemptions to sell products to ordinary customers. Change is needed and we will continue to push for powers where we need them.’
The FCA remit, or perimeter, determines which activities require FCA authorisation and what level of protection consumers can expect for the financial services and products they purchase. The perimeter is decided by the Government and Parliament through legislation.
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