Retail investment platforms have sounded the alarm to the UK financial regulator over what they see as misleading advertising by online brokers hoping to cash in on the low-cost investing boom and attract customers.
A surge in savings during global lockdowns to combat the coronavirus pandemic drove record numbers of novice investors to DIY trading platforms. The number of retail investors in the UK grew 15 per cent this year to 6.5m, according to estimates by adviser Boring Money.
Fierce competition to win new clients in a world of shrinking margins has prompted concern among retail investment platforms that the distinction between different business models in the sector is being blurred.
On the one side are the retail investment platforms, such as Hargreaves Lansdown, Interactive Investor, AJ Bell and FreeTrade, which offer funds, shares and other investment products to clients in return for a small fee.
On the other are online brokers such as eToro, Plus 500 and CMC Markets. They typically offer higher-risk strategies such as contracts-for-difference (CFDs) and spread betting. They earn profits from charging fees to trade derivatives, as well as from the spread — the difference between the price at which they buy and sell securities. These brokers typically hedge their positions, meaning that when their customers lose money, they don’t.
CFDs bet on short-term share prices moves, and spread betting involves placing a speculative bet on the price movements of an underlying instrument without actually owning it. Investors can use leverage to magnify their bets, which offers the potential for greater returns — and bigger losses.
Interactive Investor and FreeTrade have written to the UK’s Financial Conduct Authority to raise their concerns about what they see as misleading advertisements from zero-commission CFD brokers presenting themselves as free share dealing platforms, according to people close to the firms.
“It is alarming that more and more CFD platforms appear to be using share-dealing as a means to acquire more customers on to their platforms,” said a spokesman for FreeTrade, which doesn’t offer spread betting. “We’ve seen a surge in platforms pivoting to or offering share dealing services.”
New investors are often inexperienced and are particularly vulnerable to riskier investment products.
“It’s incredible that CFD providers are regulated in the same way as the investment platforms,” said Holly Mackay, founder of Boring Money. CFD providers should not “advertise themselves in the same breath as stocks and shares ISAs,” without proper protection for consumers. “Less experienced investors are more likely to want investing to be more like gambling, and be higher return than it is.”
The FCA requires that CFD brokers carry warnings on their websites about how many customers lose money on their platforms. Over 70 per cent of customers lose money trading CFDs, according to the websites of online brokers including eToro, Trading 212, Plus 500, IG Group and CMC Markets.
Critics said that some brokers focus their advertisements on their share dealing products. Once they have signed up new customers to the platform, they are encouraged to make riskier trades.
Some platforms expressed their concerns to the FCA that CFD brokers are positioning themselves in price comparison websites alongside fee-taking platforms that do not offer CFDs.
Interactive Investor, which charges a monthly subscription fee, contacted the FCA to complain that it was being positioned in online price comparisons with eToro, which does not charge commission but makes money on margin trading.
Richard Wilson, chief executive of Interactive Investor, said: “They imply they are comparable as a proposition. It’s wrong on every level.”
The FCA said it investigates all reports it receives about misleading financial promotions. It added: “We expect authorised CFD firms to meet our expectation that their communications and promotions be fair, clear and not misleading, which includes when they compare the services or products that they offer with other firms.”
“If you rock up to one of these [CFD] providers, you don’t know if you’ve walked into an investment or a casino,” said Mr Wilson. “They should not be able to call themselves investment platforms.”
Israeli group eToro added 5m new registered users this year — a 248 per cent increase. It said that only 15 per cent of its user base traded CFDs and that “access to leverage on eToro is contingent on an appropriateness pass.”
Meanwhile Trading 212, the UK’s largest zero-commission trading platform, grew from £100m in assets under management in January to £1.2bn by November, and added more than 600,000 investment and ISA accounts since January. Trading 212 did not respond to a request for comment.