Typically, CFDs have been used by professional traders and investors cocooned by a wall of screens with live prices and market data.
Consumers using Cash ISAs or the Stocks & Shares version have been exposed to risky investment products, key industry stakeholders have warned.
Contracts for Difference (CFDs) are a financial derivate instrument which allows two parties to exchange the difference in value of an underlying asset between the contract's opening and closing times and have become increasingly commonplace in the retail investor market.
Typically, CFDs have been used by professional traders and investors cocooned by a wall of screens with live prices and market data.
However, as the derivate instruments have been onboarded by more platforms, concerns have been raised about retail investor exposure to risky assets, especially at a time when the government and the Financial Conduct Authority have made more effort to get consumers to move their money from cash to investments.
FCA issues warning over Consumer Duty shortfalls in CFD market
The exact proportion of retail investor accounts that lose money when trading CFDs varies, with Interactive Brokers estimating that figure to be 69% while the FCA has previously put the total at 80%.
Last month, the regulator also issued a warning that some providers were falling short of meeting their Consumer Duty requirements, which set a higher standard of care for financial services firms in the UK to deliver good outcomes for customers.
The financial watchdog noted that there was "room for improvement" around how firms were advertising the products, despite some good practices such as simplified fee structures.
Mark Francis, director of sell-side markets at the FCA, said: "The Consumer Duty raises the bar for consumer protection across financial services and CFD providers must meet those standards.
"CFDs are complex, risky products and it is vital that providers act to deliver good outcomes for customers, communicate clearly and provide fair value. It is also important that consumers shop around and ensure they fully understand the investment and its costs."
Darius McDermott, managing director at Chelsea Financial Services, questioned the need for CFDs to even exist, especially under the Duty's regulation. "In a world where we have a duty [to investors] under Consumer Duty, why would I want to make a CFD product available?"
Major ISA providers such as Hargreaves Lansdown, AJ Bell and interactive investor, among other platforms, do not offer CFDs.
Investment Week understands that the rationale to not offer such products varies depending on the platform. In some cases, firms have simply seen a lack of customer demand whereas for others, CFDs do not align with the platform's view on how retail clients should invest.
However, a swathe of retail investment platforms and neo-brokers have continued to offer investors access to CFDs, often in a similar fashion to the way that ISAs are advertised.
eToro, IG Group and Interactive Brokers are three of the most notable providers. Interactive Brokers said: "We provide comprehensive risk disclosures and Key Information Documents to help clients understand the nature, risks, costs, potential gains and losses of this product.
"We have designed our CFDs in compliance with the FCA's rules for retail investor protection, and we take a conservative approach to leverage, imposing limits often stricter than the FCA's requirements.
"We also charge low, transparent commissions and do not mark up the spread of the underlying instrument."
IG Group and eToro did not respond to requests for comment.
FCA rings alarm over finfluencers targeting retail investors with risky CFD options
Some commentators have been more strident in their pushback on CFD offerings.
Ben Yearsley, director at Fairview Investing, said: "It is so easy to pass the sophisticated investor test on most platforms and once you have answered a few questions (truthfully or not) you can use them. I would not say they are gambling, but they are for trading not investing".
"Investing is for the long term. CFDs are for those seeking to magnify short term market movements," Yearsley added.
McDermott echoed this view, adding "there is already too much choice" and "to put another suite of products [in front of retail investors] which are more complicated and requires margin and potential leverage…is not appropriate".
Due to the leverage that CFDs offer, McDermott warned that investors can "actually lose money without investing it" and therefore "anything that has leverage attacked to it should not be available".
Wander Rutgers, UK CEO at investment platform Lightyear, argued that while CFD products "should exist" for some people who want them and know how to use them, there is a risk many young or new investors are deterred by their initial experience of investing if they encounter a CFD, rather than investing in the stock market for the long term.
However, he warned that including a combination of "vanilla investing products together with complex investing products in the same app and often under the same brand", represents a risk.
He added that Chancellor Rachel Reeves' plans to encourage more Britons to invest their cash could backfire.
"If [people] think they are investing but actually they are taking pretty active positions in crypto or very active trading or in these types of higher leveraged products, in the end that will lead them to lose [money]," he warned.
Rutgers concluded: "That will probably put them back in the position where they start under investing" rather than investing little and often.
