Shares in high-risk City firms are crashing as much as 30% after the watchdog announced a crackdown

The FCA found 82% of people lose money on CFDs.REUTERS/Jean-Philippe Arles

LONDON — Shares in companies that let clients effectively bet on stocks and commodities are getting annihilated on Tuesday after the Financial Conduct Authority announced a major crackdown on the industry.

The Financial Conduct Authority (FCA) announced that it will look to introduce a series of “stricter” rules on companies that sell products known as contract for differences (CFDs). The crackdown is driven by fears that customers are losing more money than is acceptable. The FCA found that 82% of people who use the products lose money, suggesting it is more akin to gambling than investing.

The FCA’s Executive Director of Strategy and Competition Christopher Woolard said in a statement he “has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need.”

CFDs are essentially bets on whether a share price, a currency, or commodity price will up or down. The person making the bet wins or loses in increments depending on how close or far the asset is to the price predicted. The most controversial aspect of the industry is the amount of leverage it offers — customers can lose far more money than they initial bet as CFD providers effectively lend them money.

The FCA announced on Tuesday it plans to:

• Introduce new risk warnings and make providers disclose the ratio of profits to losses;
• Limiting leverage for new clients to 25:1 in their first year;
• Limiting leverage to 50:1 for all clients. Some platforms currently offer 200:1;
• Banning accounting opening offers and other benefits designed to lure in new clients.

Woolard said in an emailed statement: “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.

“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.”

Shares in the biggest listed providers — IG Markets, CMC Markets, and Israeli firm Plus 500 — are cratering on the news, which amounts to a knee-capping of the industry.

Here’s how IG Group, the biggest CFD provider, looks just after 12.00 p.m. GMT (7.00 a.m. ET):Investing.com

IG Group said in a statement on its website:

“The Company recognises that there are shortcomings in the approach to the marketing of CFDs and binaries by certain firms, often operating from outside the UK. The Company has operated and will continue to operate to the highest standards in the industry, and its initial view is that certain of the FCA proposals could enhance client outcomes.”

Shares in Plus500, which was the subject of a major FCA investigation last year, are also collapsing. Here’s how the look at just after midday in London:Investing.com

Plus 500, which is a shirt sponsor of Atletico Madrid, said in a statement to investors on Tuesday morning that the changes will “have a material operational and financial impact on the UK regulated subsidiary, which represents approximately 20% of the Groups revenues.”

CMC Markets, the other major listed CFD providers, is also suffering a share price collapse:Investing.com

CMC Markets said in a statement to investors:

“The FCA has identified the risks to inexperienced retail investors posed by firms with a business model predicated on high churn of clients with a high loss rate. CMC has consistently focused on higher-value experienced premium clients who understand the markets and products they are trading.

“Furthermore, an integral part of CMC’s “client first” proposition over the last five years is ongoing client education about markets, products and associated risks. CMC’s business model and ongoing strategy is focused on generating revenue from client trading costs and therefore believes in establishing long-term client relationships.”

How CFDs work

Israeli CFD provider Plus500 is a shirt sponsor of Atletico Madrid.REUTERS/Andrea Comas

CFDs allow investors to make money from stock markets and asset classes without paying the fees associated with actually buying the underlying asset.

But the stakes are high — CFD providers let people buy on leverage, meaning they can bet with a higher amount of cash than they put down. If a punters bet that a certain asset will increase comes good, it means they will net outsized returns relative to how much they bet.

But if the price moves against them, they can lose far more than they put down — an initial bet of £100 could leave them will losses of £200. The industry’s mantra is “losses may exceed deposit.”

The FCA first launched an investigation into CFD providers in February, saying that it believed many companies “may not be acting in the best interests of their clients and treating them fairly.”

Last year, the FCA forced Plus500 to temporarily freeze all its accounts in the UK and stop accepting new customers over anti-money laundering concerns. An investigation by Business Insider found it was likely the result of a tip-off by rival CFD brokers who distrusted Plus500’s technology-heavy approach to on-boarding and regulation.