The firm has also been fined for failures in its systems and controls that allowed the promotions to be distributed.
City Index communicated financial promotions to the general public through daily national newspapers, magazines and on carrier bags used by selected sandwich shops.
This promotional strategy had the potential to attract customers to high risk investments without adequately describing in the promotions the commitment required and the risks involved with spread betting and CFDs.
Spread bets and CFDs are both high risk investment activities as, if the position moves against the customer, he or she can rapidly incur liabilities far in excess of the initial stake. It is therefore important that financial promotions disclose that a
customer's liability may exceed the customer's initial deposit (or margin) in a clear, simple and prominent manner so that potential customers fully understand the risk they are taking on. In failing to do this, City Index produced financial promotions
which did not contain an adequate description of the commitment required and the risks involved with spread bets and CFDs (namely the fact that a customer may be committed to place more money with the firm in order to meet the commitment
incurred through a spread bet). In addition in some cases where financial promotions did contain such warnings this was not prominent enough.
The FSA also found that a financial promotion communicated on carrier bags did not include a fair description of the nature of an investment offered by City Index. That promotion referred to a "free £25 bet". The bet was not "free" because of a requirement that a potential customer had first to place an initial spread bet through City Index in order to become entitled to the "free" bet. The customer could lose all, and potentially much more, of the customer's initial spread bet before becoming entitled to the "free" bet.
In addition the FSA found that City Index failed to maintain effective systems and controls for ensuring compliance with FSA rules and principles relating to the communication of financial promotions. This included a financial promotion which
could have created confusion in the market place between City Index and one of its competitors.
Anna Bradley, Director of the FSA's Retail Themes Division, said:
"Providing clear, fair and not misleading financial promotions is a key priority for the FSA because of the potential impact that misleading promotions can have on consumers.
Potential customers must be able to discern the key risks of an investment as well as its benefits. This is particularly the case in relation to high risk activities such as spread betting where there is a risk that a customer could lose substantially more than his original deposit. It is crucial that all firms ensure they establish and maintain rigorous and effective procedures for approving financial promotions.
"As part of our commitment to assist the industry we have produced a publication outlining for firms our approach to regulating financial promotions, some key issues and our next steps. We have also included on the FSA website some pages on financial promotions which will provide further assistance for firms. However, firms must remember that it remains their responsibility to produce balanced, unambiguous promotions that help consumers to make the right choice about the right product at the right time."
The FSA's Financial Promotions Department was set up last year to increase the monitoring and detection of financial promotions that breach regulations. Since the Department was set up, the FSA has also taken action in financial promotions cases involving AXA Sun-Life, Cantor Index (which also related to spread betting), Hemscott Investment Analysis Ltd, and Highbury Financial Services Limited.
Anyone who sees a financial promotion they think is misleading should report it to the FSA either through the FSA's website or through the financial promotions hotline on 0845 730 0168.
