Will the FCA and Brokers Ever Settle Their Differences?

Almost exactly a decade since a ‘Dear John’ letter to the CEOs of contract for difference (CFD) providers outlined the FCA’s concerns around the extent to which firms were not acting in the best interests of their clients and treating them fairly, it seems the regulator and brokers are still a long way apart.

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In February 2016, the FCA noted that many firms gathered insufficient detail regarding the types of service, transaction and designated investments with which clients were familiar; did not assess whether CFDs were appropriate for these clients; and used a scoring system that gave insufficient weight to their relevant knowledge of these products.

In mid-2019, the regulator imposed leverage limits for retail clients. It also required providers to close out a customer’s position when their funds fell to 50% of the margin needed to maintain their open positions on their CFD account and to stop offering monetary and non-monetary inducements to encourage trading.

The latest warning came just weeks after the FCA expressed concern that firms were using high-pressure techniques to encourage investors to claim they are professional clients, putting them at risk of losing more money than they can afford.

It is, of course, important to avoid making sweeping statements about the behaviour of CFD providers based on a survey that only covers around a quarter of the regulated firms that manufacture and distribute these products.

Indeed, the FCA acknowledged that most firms had used the consumer duty as an opportunity to review the products they offer and the customer experience, undertake periodic reviews and make improvements where needed.

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Kilt Comes Back into Fashion

The Scottish government announced earlier this month that it planned to issue a sovereign bond in the 2026–27 financial year. Wags have already christened the proposed bond the ‘kilt’ in a nod to the word gilt that is used to describe UK government liabilities.

At first glance, this seems like a strange decision. Scotland currently borrows funds for capital expenditure through the UK National Loans Fund and under current rules it would not be able to borrow more via bonds than it can through this fund.

But as with any proposal from the current Scottish government, the ‘i’ word (independence) is front and centre.

The ruling Scottish National Party reckons a successful issuance would provide further evidence of the country’s ability to raise funds internationally – which would be vital if Scotland were to become a separate sovereign state from the rest of the United Kingdom. They also argue it would raise Scotland’s profile among potential inward investors.

The nationalists claim Scotland’s healthy credit rating is a vindication of its economic strategy. Moody’s and Standard & Poor have determined that lending to Scotland is no more risky than advancing funds to the UK government.

However, unionists point out that this rating is tied to that of the UK as a whole and would not remain at its current level if Scotland were to leave the union. It is also true that many in the current Scottish government would like to remove some of the borrowing constraints imposed from Westminster, which would affect debt levels and therefore creditworthiness.

The cost of borrowing this way would also likely be higher than under the current system where Scottish borrowing is included as part of wider UK government bond issuance. UK sovereign bonds are also more liquid than those of new issuers – a key attraction for potential investors.

Credit agencies are understandably reluctant to be seen to make political statements, so the observation that their assessment of Scotland’s ability to repay debt could be affected if it was no longer part of the UK is significant.

With parliamentary elections coming up in less than six months’ time, this could become a moot point. But if the nationalists remain in power after May 2026, Scottish bonds could become the UK’s next political football.

Taking Stock of Investor Attitudes

The scale of the challenge facing a chancellor of the exchequer keen to see more of the UK population’s wealth circulating around its capital markets has been highlighted again in a new report from Capital.com.

It is estimated that there is more than £400 billion of stagnant capital (funds that earn little or no return for the holder) sitting in UK deposit accounts.

One of the factors linked with deterring people from stock market investment is a lack of understanding of the nature of risk and how limited returns reduce capital over time.

It is understandable for individuals lacking economic literacy to look at equity volatility and believe they lack the knowledge to buy and sell at the right time. The UK also has a strong tradition of home ownership that encourages many people to believe they are better off putting money into their own home or extra property.

However, the UK stock market has generally outperformed the property market over the long term, especially when accounting for real returns after inflation and including factors such as dividends and rental yields.

Many observers have noted that the low-risk investors surveyed by Capital.com viewed cryptocurrencies and stocks and shares as pretty much equally risky. Yet the results were similar for more experienced mid-level investors.

Another surprising finding was that ‘lack of time to learn’ was the least important reason for hesitation among low-risk investors. This suggests that if the industry can get its messaging right, even the most cautious investor could be won over to the world of stocks and shares.

The fact that this group is as likely to get its financial guidance from social media as from online investment platforms or research firms is a possible starting point. What these latter groups need to do better remains the question.

Source: Finance Magnates