We reviewed a sample of contracts for difference (CFD) providers to understand how they comply with their obligations under the Consumer Duty 'Price and Value’ outcome.
CFD providers manufacture over-the-counter (OTC) derivatives and sell them directly to investors. This means CFD providers have many opportunities to decide the overall price paid by retail clients trading CFDs.
This review, as highlighted to the CFD sector[2], looked at how CFD firms’ deliver fair value in areas including bid/offer spread pricing, commissions and overnight funding charges. It also assessed how well CFD firms are using their Consumer Duty ('the Duty') fair value assessments to deliver the price and value outcome, including a focus on target market and vulnerable consumers.
Fair value is about more than just price. The Duty addresses other factors that can result in products or services providing poor value, such as unsuitable features that lead to foreseeable harm or frustrate a retail client’s intended use of the product or service.
The examples provided below of good practices and areas for improvement should help CFD providers give their retail clients fair value, ensuring the price these clients pay is reasonable compared with the benefits they get from trading CFDs.
1. Who this will interest
These multi-firm review findings will be of interest to:
- All FCA-authorised investment firms active in manufacturing, promoting or distributing contracts for difference, spread bets or rolling-spot-forex (all referred to here as 'CFDs') to retail clients.
- Consumers already active in, or considering trading, CFDs. These complex derivatives are considered high-risk investments due to the potential for the leverage they provide, magnifying both trading losses and other costs.
2. Our approach
We requested information from around 25% of regulated providers which manufacture and distribute CFDs. This sample included a wide range of firms, from some of the largest providers to some of the smallest, in terms of number of retail clients and amount of client money held.
Our request asked for information about how firms were implementing the Duty, including:
- Board-level oversight, including of 'price and value'.
- The quality of firms’ fair value assessments (FVAs).
- How they were considering their target market, including any changes to the COBS 10A appropriateness test required before retail clients can trade CFDs.
- CFD costs and charges, including spreads, commissions, and the funding of positions held overnight by clients.
- We also asked how firms apply overnight funding charges when clients run offsetting long and short positions, rather than simply closing them out and realising their profits or losses.
- Whether firms pay interest on clients’ funds deposited with the firm to support their CFD trading activity ('margin').
3. Overall findings
3.1. Applying the Consumer Duty and proportionality
Our review identified inconsistent application of the Duty.
Good practice
We were encouraged to see that most firms used the Duty as an opportunity to review the products they offer and the customer experience, undertaking periodic reviews and making improvements where necessary.
Areas for improvement
All firms must act to deliver good outcomes for retail customers. Whilst the Duty applies in a reasonable way, some mid to small sized firms had made few or no changes in response to the Duty, when others had. This suggested that these firms may have failed to fully consider their obligations FG22/5 1.6 (PDF)[3].
Most firms provided comprehensive survey responses, but our review of submissions identified inconsistent consideration and application of the Duty. This applied both to Duty obligations in general and specifically to the price and value outcome. We refer firms to our publication Price and Value Outcome: Good and Poor Practice update[4], and in particular the section covering 'holistic consideration across the CD outcomes'.
A minority of firms’ annual Consumer Duty board reports mainly focused on a restatement of the Duty’s requirements, rather than providing adequate analysis on whether the firm met them. As a result, these documents gave little information on how the firm had concluded their offerings were consistent with the Duty.
3.2. Fair value assessments (FVAs)
All firms assessed contracts for difference, spread bets and rolling spot forex in one document. This may be appropriate, but only if the firm fully considers the unique features of each product, FG22/5 7.19 (PDF)[4].
We also considered whether firms were creating separate FVAs for any of their other products.
Good practice
For CFD FVAs, most firms conducted peer comparisons against FCA authorised direct competitors, and they provided good reasons for selecting these peers.
More comprehensive CFD FVAs covered scope, analysis and justification for conclusions, considering both monetary and non-monetary factors in their assessments. These included target market, consumer understanding and trading characteristics rather than just comparisons with firms’ peers.
Firms diversifying into products other than CFDs assessed each of them in separate FVAs. They applied revised assessment criteria and peer comparisons tailored to the product.
Areas for improvement
Many firms’ FVAs gave only limited consideration to costs paid by consumers, other than those for executing trades (‘spread costs’). Reviews primarily relied on a comparison of spread prices (the bid/offer spreads streamed on the firms’ platforms), execution speeds and system performance. This is a material gap in FVAs as other costs can be a significant part of the overall price retail clients pay, PRIN 2A.4.8R(3), PRIN 2A.4.8R(3)(b)[5].
Some firms’ assessments drew from a narrow or inappropriate peer group, including comparison with firms based in jurisdictions other than the UK.
Most firms reported they did not consider counterparty hedge pricing in their overall value assessment, even though this is a key part of firms’ price formation.
Many firms had either not considered other costs and charges or not reviewed them as thoroughly as they had spreads. Overnight funding charges, covered further below, are an example of an area where FVA improvements could be made. See our review of fair value frameworks[6], Chapter 7, non-handbook guidance (PDF)[6].
We saw wide variations in the effective interest rates paid by retail clients on overnight funding charges by different firms. Firms did not provide adequate justification for these variations. We also saw firms not fully disclosing these charges and the impact they could have on a CFD’s overall performance, PRIN 2A.5.3R, PRIN 2A.5.7G[6].
Firms were applying overnight funding charges separately on each client position, with no offset allowed where retail clients hold long (buy) and short (sell) positions in the same CFD. This can result in clients’ matched positions potentially incurring significant ongoing charges, PRIN 2A.9[7].
Only a small number of firms were paying interest on retail clients’ margin deposits. Most of those who didn’t pay interest hadn’t properly considered whether doing so would be appropriate.
Many firms had not adequately considered other important indicators of value, such as consumer complaints and satisfaction metrics. Key indicators beyond execution quality are relevant in assessing fair price and value.
Some firms did not adequately consider if they should make changes to appropriateness testing or place any new, additional restrictions on retail clients’ being able to undertake CFD trading in light of the Duty obligation to avoid causing foreseeable harm, PRIN 2A.2.8R, PRIN 2A.2.1R[8].
Some responses suggested poor controls for accepting and ongoing monitoring of vulnerable retail clients, PRIN 2A.9[11].
3.3. Assessing the target market
Firms can only deliver fair value in a complex derivative product such as a CFD when they sell them to an appropriate target market. Firms’ consideration of how they achieve this, both when opening a new retail client account and subsequently, formed a key part of our review, PRIN 2A.4.2R[7].
3.3.1 Appropriateness testing and firms’ use of 'wealth bars'
We have previously reviewed the robustness of CFD providers' COBS 10A appropriateness test policies and procedures and publicised our findings. However, we remain concerned that CFDs are still being sold inappropriately to retail clients who do not fully understand the product’s risks and complexities. We wanted to examine if CFD providers had modified their practices after considering their Duty obligations.
While not part of the current COBS 10A rules and guidance on appropriateness testing, we knew some CFD providers were applying ‘wealth bars’ as part of the account application process. This involves setting minimum salary and savings levels below which a firm would not accept a prospective retail client, even if they passed the firm’s appropriateness test. We wanted to assess if consideration of target market had led to this practice being more widely adopted following the Duty’s implementation.
Good practice
Some firms had strengthened their appropriateness testing because of the Duty. Changes included:
- a more robust and extensive question set
- ensuring retail clients retaking appropriateness tests got different question sets
- more demanding pass rates
- introducing or extending cooling-off periods
- limiting the maximum number of times an applicant can retake a test
Most firms considered the potential conflicts associated with allowing applicants who have failed the appropriateness test but still wish to proceed ('persistent clients'). The Duty does not prevent a firm from accepting these clients, provided they help them understand the consequences of their decision. However, many firms have introduced a policy of declining such retail clients altogether.
Some firms had chosen to tighten or introduce minimum criteria on levels of client wealth, effectively 'stopping people at the door' if they considered them inappropriate for the firm’s product or services. Considering clients’ salary and savings levels during their application has allowed firms to further define parameters for their target market.
Areas for improvement
Some firms said they had made few or no Duty related changes, even after conducting Duty-prompted reviews. Firms may want to consider how robust their current appropriateness testing is, and how they try to balance providing services to persistent clients with the obligation to avoid foreseeable harm (PRIN 2A.2.8[12]).
3.3.2 Vulnerable clients
Adequate monitoring for vulnerable retail clients is important as CFDs are extensively used for short-term speculative trading. The leverage CFDs provide can also significantly increase consumers’ trading losses and costs.
Good practice
Survey responses confirmed that monitoring clients for vulnerability characteristics at the onboarding stage is widespread across the market, as is the training of retail client-facing staff to identify vulnerability from their ongoing contacts with clients.
We also saw good practice where firms have moved to proactive monitoring of daily or intra-day trading and funding to identify potential concerns. Examples include where firms have introduced alerts on affordability or placed restrictions on marketing to specific retail clients.
Some firms that accept persistent clients have partially managed this risk by automatically applying vulnerability measures when their accounts are opened. Classifying clients as potentially vulnerable in this way then prompts higher levels of ongoing monitoring.
Areas for improvement
Some firms had only implemented reactive measures to identify vulnerable retail clients, such as training staff to consider vulnerability where client communications indicate this. The Duty requires firms to regularly monitor outcomes and take appropriate action where they identify customers are, or are at risk of, getting poorer outcomes (PRIN 2A.9[13]).
Many firms considered potential client vulnerability arising from the funding of clients’ trading activity and monitored credit card usage at the onboarding stage. However, some responses suggested the need for improvement or introduction of intra-day monitoring of trading and funding activity, particularly where this does not match the client’s past wealth disclosures or involves increased use of credit cards for funding.
Some firms, including those with reasonably significant client numbers, said they had identified few or, in some cases, no vulnerable clients. This could call into question how effectively these firms consider client vulnerability. Given the potential for vulnerable retail clients to access CFDs, firms that identify few or no vulnerable clients may want to review the effectiveness of their arrangements for detecting vulnerability.
3.4. Fees and charges, including overnight funding fees
CFD providers typically seek to compete on their trading spreads, often making comparisons with competitors in financial promotions. But CFD trading, along with the broader service firms provide, includes a range of other fees and charges. These can vary significantly between firms both in nature and rates applied.
Our review checked how firms had considered their Duty obligations for these other costs, both how appropriate these charges were and how clearly they were disclosed to retail clients (PRIN 2A.5[10]).
We wanted to examine whether information about costs other than spreads was easy to find and understandable. This is clearly important in helping retail clients make informed choices. It also links to firms’ obligations under the Duty’s outcome of 'Consumer Understanding'.
We looked particularly at overnight funding charges, which can be a significant source of revenue for firms and a substantial ongoing cost for clients when they hold open CFD positions longer term.
Good practice
Most firms had reviewed overall charges, both pre and post Duty implementation. Many had simplified fee structures in response, such as removing certain redundant charges or attempting to improve the quality of disclosure about the remaining charges. However, changes mainly related to less material charges such as account dormancy fees, with little if any amendment of other charges including the more material overnight funding charges.
Firms should disclose all applicable fees and charges (COBS 6.1ZA[8]). Some firms said they disclosed fees and charges in real-time within deal tickets as well as in contractual documents. Firms told us this can support consumer understanding (PRIN 2A.5[17]). Others relied mainly on disclosures in their Terms & Conditions.
Some firms drew retail clients’ attention to the short term and speculative nature of CFDs, and the potential costs involved in holding them for longer periods. This is positive, but these messages can be lost in the body of long sections of text. Firms should ensure that key information is clear, visible and accessible FG22/5 8.12 (PDF)[9].
Areas for improvement
There were significant variations between firms in the levels of charges made to retail clients, particularly those for maintaining overnight positions. At the extreme, some firms charged retail clients for overnight short positions when other providers would have applied a credit to the client’s account on the same position. Firms need to consider all charges in the context of other fees levied and be able to demonstrate that overall costs are reasonable compared with the benefits consumers receive (PRIN 2A.4[14]).
Most firms could improve their disclosure of charges to retail clients. Given the complex nature of some charge calculations, clearer explanatory notes would help retail clients better understand these charges.
In the case of overnight funding charges, firms typically quoted the actual amount the retail client pays or receives (depending on product and whether the client has a long or short position). Some firms also showed the implied interest rate, but this was typically quoted as a daily interest rate rather than its annualised equivalent. While CFDs are normally held for short periods, some positions can be held longer term and annualised equivalent rates are likely to be clearer and easier for retail clients to both understand and compare with other borrowing rates.
Disclosures could be clearer about:
- how overnight charges are calculated
- charges being applied on the full consideration the CFD gives the client exposure to with no offset against the funds held on the client’s account
- the impact the leverage inherent in trading CFDs has on the size of these charges relative to the client funds invested to hold a position
Firms may also consider reviewing Key Information Documents (KIDs), and other relevant client communications, to better highlight the impact of other charges unrelated to spreads. Currently, KIDs reference overnight funding charges but may not clearly highlight their impact on the overall value clients receive.
We also observed that KIDs typically state there is no recommended holding period for a CFD, though some refer to these being products better suited to short-term trading. These KIDs therefore give little prominence to the negative impact of overnight funding charges on outcomes. This is inconsistent with the approach taken in KIDs on disclosures about other risks affecting outcomes, such as secondary currency risk.
3.5. Matched/hedged client positions
CFD providers may allow clients to open equal and opposite positions in the same underlying asset (hedged open positions), rather than closing them in trade order (first in/first out).
The effect of this could be to leave retail clients with separate (but matched off) open buy and sell contracts on which they may incur unnecessary charges.
We wanted to assess whether firms were allowing hedged open positions and, if so, how far they had considered if this might cause foreseeable harm to clients.
Good practice
Some firms discourage retail clients from holding hedged open positions (although all firms surveyed confirmed they allow it).
Areas for improvement
Firms described a variety of approaches to margining hedged open positions. Some charged the full initial margin on both long and short positions, treating them as entirely separate trades. Others recognised the connected nature of the matched positions, either charging on one side only or waiving the margin entirely.
However, survey results suggested that applying overnight funding charges to clients’ long and short hedged positions appears standard industry practice. Several firms said this was due to platform constraints or the charging practices of hedge counterparties. Some firms also said any reduction in fees or charges for hedged positions could encourage retail clients to hold hedged open positions.
Our analysis of responses identified shortcomings with disclosure of the costs of keeping overnight open long and short positions versus closing positions and crystallising the applicable profits or losses. The costs of holding these hedged positions could be substantial as CFD clients are charged fully for gross open positions while having no actual net market risk exposure. The Duty’s requirement to consider the potential for foreseeable harm also applies to overnight funding charges.
3.6. Interest on clients' accounts
Most firms had considered offering interest on CFD accounts but had decided not to. By comparison, those that have diversified into other product offerings, such as stocks, do pay interest on retail clients’ uninvested cash balances related to those products.
Survey responses overall confirmed that CFD clients pay and receive interest asymmetrically. While retail clients typically pay substantial interest to fund a long CFD position – charged on its full underlying consideration – they receive no interest on their monies placed with firms as margin. With market interest rates much higher now than in previous years, this represents a greater opportunity cost to retail clients.
Firms may want to review their position on paying interest on client funds as part of their FVAs.
Good practice
Prompted by higher market interest rates, several firms had reviewed their approach on paying interest on CFD clients balances. These periodic reviews included consideration of how firms that offer alternative short term investment products treat retail clients.
Areas for improvement
Firms may want to review if charging retail clients funding interest on full consideration without also paying any interest on margin deposits is consistent with providing fair value. Firms can refer to our 2023 retention of client interest Dear CEO letter (PDF)[5]. Firms should have regard to the COBS 22.5.20R[6] financial incentives rule when performing FVAs on paying interest on client balances.
4. Next steps
We encourage all firms manufacturing or distributing CFDs to retail clients to consider these findings and address any gaps in their delivery of the Duty fair price and value outcome.
We will engage directly with selected firms in this review to provide more detailed feedback.
We are considering further work in some areas identified from the survey.
We will continue to assess firms' ongoing compliance with Duty obligations and how they are delivering fair price and value as part of our ongoing supervisory oversight.