The FCA’s supervisory and thematic work has found increasing evidence of poor conduct and risks to investor protection from retail contracts for differences (CfDs). In addition, there has been an increase in the number of firms operating in the CfD market, often selling through online platforms, prompting concerns from the FCA that retail customers trading CfD products do not have an adequate understanding of these products.
The FCA launched a Consultation late in 2016 on a package of measures designed to:
- address those risks;
- improve standards across the sector; and
- ensure that consumers are appropriately protected.
This consultation has now closed, however in the meantime, there have been developments at a European level.
In July 2017 the European Securities and Markets Authority (ESMA) announced that it was considering use of its product intervention powers in relation to the sale of contracts for difference, binary options and other speculative products to retail investors. Following this announcement, the FCA have decided to delay making final rules for UK firms pending the outcome of ESMA’s discussions. They will continue to engage with ESMA and will reconsider making final rules in the first half of 2018. The FCA has also stated that they will undertake further policy work in light of the consultation feedback which is expected to include a further request for additional data from a sample of firms.
What were the proposed changes in the consultation?
- standardised risk warnings and mandatory disclosure of profit-loss ratios;
- a leverage cap at a maximum level of 50:1 for all retail clients and lower leverage caps across different assets according to their risks;
- lower leverage limits for inexperienced retail clients that do not have 12 months or more experience of active trading of CfD products, with a maximum ratio of 25:1; and
- a prohibition on providers using any form of trading or account opening bonuses or benefits to promote CfD products.
The FCA have also included policy considerations for retail ‘binary bets’, which are often marketed in a similar way to CfD products and permit clients to bet; on whether prices of financial instruments will be higher or lower than a set price as a future point in time. At present, these are currently regulated by the Gambling Commission. However, the government is now of the view that binary options, where they relate to specific underlyings, should be considered as MiFID financial instruments. It therefore proposes to bring activity in relation to these instruments within the regulatory perimeter as it transposes MiFID II into UK legislation.
Am I impacted?
The proposals will directly affect:
- retail clients and potential clients in CfDs, spread betting and rolling spot foreign exchange products;
- providers and distributors of retail CfD products; and
- providers and distributors of binary bets.