The problems were all the more acute after it found 76% of customers who bought CFD products on either an advisory or discretionary basis during its review period between July 2015 and 2016, lost money.
In an open letter to firms, the FCA also suggested there was a “wide range” of communication failings at CFD firms as well as issues with monitoring and challenging practices which it said were “ineffective and did not meet our expectations”.
It also found many firms could not properly explain who their target market was, and used overly broad terms, nor could they explain how they met their needs.
“In our view, excessively broad definitions of target markets may lead firms to conclude that CFDs are suitable and/or appropriate for the majority of potential customers, even when this is unlikely to be the case,” the FCA said.
“Additionally, if providers share a poorly defined target market definition with their distributors to help their decision-making, then these intermediaries may also reach the same incorrect conclusions about an end-consumer’s suitability for this high-risk, complex financial product.”
The review assessed 19 firms that provide CFDs to intermediaries, and 15 firms that distribute CFDs to retail investors.
It found “most” sample providers had flawed due diligence processes for taking on new distributors and that conflict of interest management in all distributors was weak.
Several distributor firms had problems with their processes and the criteria they consider acceptable when categorising clients as elective professionals, the FCA added.
Megan Butler, director of supervision at the regulator, said: “The provision and distribution of CFD products and delivering good customer outcomes in this sector will remain areas of focus for us. We will undertake further work on these topics and may ask you to take part in a follow-up review to assess how firms have responded to this feedback.
“Where we identify breaches of our rules, we will take appropriate action, including appointing investigators to examine specific firms, individuals or practices.”