The Financial Conduct Authority revealed a proposal to implement stricter rules in the spread-betting industry.
The proposal came after an investigation into the sector discovered that 82% of the customers lost money using retail financial spread-betting products known as "contracts of difference."
Contracts of difference (CFDs) are agreements between two parties to exchange the difference between the opening price and closing price of a contract. Among the products available for consumers using CFDs are spread bets and rolling spot foreign exchange contracts.
"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," stated the regulator.
After the announcement, shares in spread-betting firms plunged on Tuesday. Retail brokerage CMC markets saw a 29.6% drop in shares. Shares in IG, which accounts for 40% of the UK financial spread-betting market, plunged by 31.3%.
The six-year investigation of FCA identified cases of poor conduct across the sector, which includes failure to adequately consider if CFDs were appropriate for customers, and failure to provide adequate risk warnings to retail clients.
With the results of the probe, the financial watchdog proposed for the introduction of standardized risk warnings and mandatory disclosure of profit-loss ratios on client accounts.
Moreover, a 25:1 leverage is also expected to be introduced for inexperienced retail clients or those who do not have at least 12 months of experience in active trading in CFDs.
A 50:1 leverage cap is also proposed to be introduced for all retail clients. Lower leverage caps across different assets according to risks are also expected to be introduced.
"We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products," the FCA added.
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