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UK retail customers are losing millions of pounds on high-stakes bets in financial markets after being pressured to abandon consumer protections by opting to be treated as professional investors, the watchdog has warned.
The Financial Conduct Authority said financial influencers on social media were also promoting risky bets offered by overseas firms that were not subject to UK regulations. It said 90,000 people had lost about £75mn over four years at one such company.
The losses stem from so-called contracts for difference (CFDs) which allow investors to bet on moves in asset prices without owning the underlying securities, and use leverage to magnify gains and losses. The FCA has estimated 75 per cent of customers lose money on such products.
When retail customers agree to be categorised as professional investors, they are no longer shielded by leverage limits or a cap on the amount they could lose on the bets they make using CFDs, the FCA said.
It expressed concern that “firms are using high-pressure techniques to encourage investors to claim they are professional clients, putting them at risk of losing more money than they can afford”.
“Investors should be very wary of CFD firms attempting to bypass our rules in this way and of those on social media touting investments which look too good to be true,” said Mark Francis, FCA director of sell-side markets.
Consumer groups welcomed the FCA’s warning on CFDs but some worry that government calls for the watchdog to ease the burden of its rules to encourage more economic growth and investment could leave retail investors more vulnerable to mis-selling.
To be categorised as professional investors, most people need to meet at least two of three criteria: having more than £500,000 to invest, doing at least 10 trades per quarter for the past year and having at least a year’s experience of working in financial services.
But the watchdog is planning to publish proposals in December to change these rules, which could allow more people to invest in a wider range of products but without the same level of protection.
“Today’s warning is exactly the kind of activity that we should be seeing from the regulator,” said James Daley, head of consumer group Fairer Finance. “Yet at the same time, the FCA is bowing to government pressure to review how investors are categorised — which may result in changes that make it easier for retail consumers to invest in high-risk assets.”
The watchdog said it would take action against companies breaking its rules that ban them from pushing retail clients to be categorised as professional investors.
It also committed to continue cracking down on financial influencers — or “finfluencers” — who illegally promote financial products without authorisation. “Some of these finfluencers promise consumers unrealistic returns if they copy trades, invest in managed accounts or pay for daily trading tips,” it said.
The FCA imposed restrictions on the sale of CFDs to retail customers in 2019 — including a 30-to-one leverage limit and a block on clients losing more than what is in their account. Since then, the watchdog has issued several warnings about mis-selling of the products.
On Thursday, it said the restrictions on CFD sales prevented nearly 400,000 people a year from losing more than their initial stake on CFDs, estimating this was worth between £267mn and £451mn.
The FCA warning was welcomed by eToro, one of the country’s leading providers of CFDs. “We have clear frameworks in place for those experienced individuals who wish to apply for professional status, and continue to focus on education to help all investors make informed decisions,” said Dan Moczulski, UK managing director at eToro.
