The Financial Conduct Authority, (FCA), has published a consultation paper with the less than engaging title of “ CP16/40; Enhancing conduct of business rules for firms providing contract for difference products to retail clients”, you can find the full text here. So why am I, an Independent Financial Adviser giving it the oxygen of publicity on this blog? As a firm we do not offer access to these contracts and we would advise our clients to steer well clear for reasons that will become apparent later.
To try and sort the jargon out, contracts for differences, (CFDs), include day trading using an account with deposit and settling loan facilities, spread bets, rolling spot FX contracts, binary bets and other investment accounts with leverage. This really means;
Day trading using an account with deposit and settling loan facilities; buying and selling actual shares and stocks, buying and selling options to buy and sell stocks and shares, using an Internet based trading account, where the client has paid a trading deposit and is liable to settle any losses in full within a fixed accounting period.
Spread Bets; complex contracts to make payments or receive returns on one or more outcomes in the future, with a variable magnitude depending on the final indices.
Rolling Spot FX contracts; foreign exchange contracts, say exchanging Sterling for Yen, where the contract is arranged in advance to be at a specific date and time, using the rate then available.
Binary Bets; the investment version of Bruce Forsyth’s “Play your Cards Right”, higher or lower at the end of trading!
Leverage; integrated borrowing to increase the size of the investment, so magnifying any gains or losses. Typically, an Internet trading account will allow you to make purchases of so many times your initial deposit, often 25 to 50, so a big loss will wipe out your deposit and then you will be presented with a large bill to settle.
According to the FCA, there are at least 97 authorised firms whose activities include selling and distributing Contract for Differences to retail clients, with around 1,050,000 funded retail client accounts and 525,000 active clients. The majority of these clients are overseas, so the FCA estimate that 125,000 are UK based.
The FCA did further research on investment outcomes over a given year and this really gives me pause for thought; more than 80% of the client accounts sampled made a loss over a year, averaging £2,200 per account. Given that dismal outcome, why would you do it?
My colleagues and I have seen Internet pop-ups, promoted websites and dubious referrals to many providers of CFDs that emphasise ease of use and carefully avoid the “elephant in the room” of potential losses. These articles from the Daily Telegraph, here, (http://www.telegraph.co.uk/finance/personalfinance/investing/11152406/The-DIY-day-traders-I-lost-250k-but-made-it-all-back-and-more.html), and here; (http://www.telegraph.co.uk/finance/personalfinance/investing/5849176/Day-trading-I-lost-200000-in-a-day.html) put a mostly positive spin on CFDs, but even the keen advocates interviewed explain that they have been on the wrong side of large losses in the past.
The FCA are looking to increase the disclosure to potential clients and restrict the potential leverage, to try to reduce client detriment, but this will make no difference to the ill-informed, naïve, desperate or greedy. With a researched 80%+ expectation of losses, there has to be better options for your money and time.
For our part, we can see no reason for anyone to risk their personal finances on such a high-risk proposition. If you have money to burn and are bored of the roulette wheel, blackjack or tournament poker, then you may be interested, but for the majority of us and our clients, these opportunities appear to offer significant downsides, unsustainable risks and substantial chance that the outcome is measured in terms of uncapped losses.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.