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CP18/38 FCA Proposes Permanent Restriction Rules for Retail CFDs

10th December 2018

Proposed Permanent Restrictions for Retail CFDs and Ban on Retail Binary Options

The UK Regulator has now proposed rules to address the sale of certain complex derivative products and the harm they pose to retail consumers.

On Friday, the FCA published two consultation papers that propose permanent measures for both retail Contracts for Difference (CFDs) and binary options. The two consultations, CP18/37 and CP18/38, set out the FCA’s proposed rules that would apply to firms acting in or from the UK and look to:

- Restrict the sale, marketing and distribution of contracts for difference (CFDs) and similar products to retail consumers; and

- Ban the sale, marketing and distribution of binary options to retail consumers.

Concerns over CFDs sold to retail clients

Two years ago the FCA previously consulted on proposed domestic measures for CFDs sold to retail clients in their consultation paper CP16/40, published on 6 December 2016.

Since then, there has been much concern by regulators both at home and abroad, about CFDs and Binary Options and the risks they pose to Retail Consumers in the UK and internationally.

The main concern the regulators have is about the inherent risks involved with these products and the large and unexpected trading losses that can result in trading them, as well as instances of poor conduct found at a number of firms that sell these types of products.

In Europe, ESMA introduced temporary CFD product intervention measures across Europe earlier this year, and whilst the FCA’s proposed rule changes are substantially the same as ESMA’s, they would however have a permanent effect and also apply to ‘closely substitutable products’.

This would include:

Firms that sell CFDs to retail clients, would be required to:

• Set a limit leverage between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides;
• Close out a customer’s position when their fund fall to 50% of the margin needed to maintain their open positions on their CFD account;
• Cease offering monetary and non-monetary inducements to encourage trading;
• Provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses; and
• Provide protections that guarantee a client cannot lose more that the total funds in their CFD account.

The  FCA estimate their proposed rule changes could save retail consumers up to £17M per year via the permanent ban on binary options as well as reduce the risk of fraud by unauthorised entities claiming to offer these products.

In addition, the regulator estimates that the proposals for CFDs could reduce annual losses for the UK’s retail consumers by between £267.4M to £450.7M.

Speaking for the FCA, Christopher Woolard, the Executive Director of Strategy and Competition at the regulator said:

“We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products. This is despite focused supervisory work over several years to try and improve firms’ conduct. Today’s proposals will enhance consumer protection by banning binary options and ensuring CFDs are only marketed and sold to consumers who understand the risks from trading these types of products.”

Whilst the FCA’s CFD Consultation (CP18/38) includes Contracts for Difference (CFDs), financial spread bets and rolling spot forex contracts that qualify as MiFID financial instruments, the regulator is also seeking feedback on whether other complex derivative products, such as futures or similar over-the-counter (OTC) products that may pose similar risks of harm to retail consumers and could benefit from similar rules, or if this would have unintended effects.

Firms wishing to have their opinions on the proposed rules considered should ensure they reach the FCA no later than 7th February 2019 for both the Binary Option Consultation Paper (CP18/37) and for the CFD Consultation (CP18/38), with comments on extending the proposed measures to other complex derivative products closing on 7th March 2019.

As a result of the UK Cryptoasset Taskforce Final Report published in October, the regulator will look to consult separately on potentially banning the sale of derivative products referencing cryptocurrencies to retail consumers, including CFDs, early next year.

Related Reading:

• CFD Product Intervention Measures by ESMA
• CP18/37: Product Intervention Measures for Retail Binary Options
• CP18/38:Restricting CFD Products sold to Retail Clients
• UK Cryptoasset Taskforce Final Report on Cryptoassets
• CFDs & Binary Options: Product Intervention Measures Agreed by ESMA
• CFD Providers: Strict Rules on Horizon for Spread Bet Firms

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