The Financial Conduct Authority (FCA) has said it has ‘serious concerns’ over the way CFDs (contracts for difference) are sold to retail investors.
The speculative tool has become popular with investors despite roughly 76% of users losing money through it in 2016.
CFDs are being marketed as an alternative to buying shares in a company as it allows people to invest without buying assets. Investors can bet on the direction of a share price, currency and the change in price while avoiding capital gains tax and stamp duty.
They are able to take out bets that are larger than their initial deposit which can mean a greater return whenever the price moves in their favour, and an outweighed loss when it does not.
Over a 12-month period, the FCA investigated 34 firms which were providing CFD products and found that a majority of retail customers who bought them made a loss.
The watchdog wrote a letter of concern to CFD providers, asking them to “pay due regard to the interests of customers and treat them fairly”. This prompted some companies to stop distributing them to retail consumers.
The FCA said: “Given the significant weaknesses we found across our sample, we believe there is a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CFDs.
“As a result, consumers may be at serious risk of harm from poor practices in this sector.”