The Central Bank has advised consumers to take care with the high-risk and complex nature of Contracts for Difference (CFDs) before making investment decisions.

Bernard Sheridan, Director of Consumer Protection, said CFDs pose a risk to consumers.

“Following a themed inspection of the CFD market, we identified several issues in relation to execution-only sales," said Sheridan. "It is our view that CFDs are unsuitable for investors with a low-risk appetite.

CFDs allow a client to take a position on the movement in the price of financial instruments (e.g. shares, share indices, currencies, commodities) without owning the underlying instrument. This gives retail clients access to the gains and losses of financial markets that would otherwise be limited to institutional and professional investors.

Because CFDs are a leveraged product, they can magnify clients' potential losses. Sheridan continued to explain the risk posed by CFDs is due to the 'volatile nature' of their market, combined with potential for the consumer to lose more than initially invested.

In Association with

The themed inspection Sheridan mentioned covered retail clients who invested in CFDs during 2013 and 2014. It consisted of a desk-based review of all active investment and stockbroking firms providing CFD products which are regulated by the Central Bank or operating in Ireland on a branch basis. This totaled nine firms.

The review was followed up by onsite inspections in four of the firms. The inspection found over 39,000 retail clients, of which almost 5,000 were Irish resident, invested in CFDs with Irish-based investment and stockbroking firms during this period.

Main Findings

The main findings were:

• 75% of clients made a loss, of which the average loss was €6,900.
• Criteria used for assessing appropriateness varied among firms. Although some firms went over the requirements, the Central Bank determined that in others, the client’s knowledge and experience may have been overestimated.
• Most firms were in compliance with regulatory requirements on complaints handling. However, some failed to maintain up-to-date records.
• Marketing material was not always constructed and presented in a sufficiently-balanced way to outline both the risks and benefits of CFDs.

Where the Central Bank has identified risks to consumers, due to the issues outlined above, formal supervisory requirements have been imposed on the relevant firms.

The Central Bank has also sent a letter to all MiFID firms, detailing the findings of this inspection together with recommendations to enhance their compliance arrangements, where relevant.