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FCA Final Rules: CFD & CFD-Like Options

FCA Confirms Permanent Restrictions on the Sale of CFDs and CFD-like Options

1st July 2019

The FCA Confirms CFD & CFD-Like Options Final Rules - Set to come into effect from 1st August 2019 (for CFDs) and 1st September 2019 (for CFD-Like Options), the FCA have today confirmed new permanent rules.

Today the FCA confirmed new rules restricting the sale, marketing and distribution of CFDs and CFD-like options to retail customers.

The new rules look to address the harm posed to retail customers by making the temporary restrictions for CFDs, as imposed by ESMA, now permanent.

This means that for CFDs and CFD-like options sold to retail clients, firms will be required to:

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

Remember that references the FCA makes to CFDs include financial spread bets and rolling spot forex products.

CFD-like Options

It should be noted that the FCA have included ‘CFD-like’ options, the effect of which is to ensure that firms do not try to avoid the regulator’s measures by offering closely substitutable products, which the UK regulator believe poses the same risk of harm.

CFD-like options includes options that:

• have similar pay-out structure and risk features as CFDs; and
• which are sold under a variety of commercial labels, including turbo certificates, knock outs or delta ones.

Unlike CFDs, CFD-like options were not included in ESMA’s temporary restrictions.

The FCA have provided further information on the scope of the restrictions to be imposed upon CFD-like options and clarified that they will:

• Exclude firms that sell CFD-like options in other jurisdictions, where the product is sold through an intermediary outside the UK. 
• Exclude the sales and distribution activities of EEA firms outside the UK. These firms are still prohibited from actively marketing unrestricted CFD-like options to UK retail consumers.

It should be noted that should intermediaries sell, market, or distribute CFD-like options in or from the UK, then they will be also subject to the FCA’s rules to ensure that UK consumers will be protected.

“Our intervention follows evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them. The new rules maintain and strengthen protections for consumers.”

Christopher Woolard, FCA Executive Director of Strategy & Competition

The new CFD & CFD-like Options Rules will apply from 1 August 2019 for CFDs and one month later from 1 September 2019 for CFD-like options.

What to expect next:

The regulator has said that it expects firms to comply with these restrictions and that their ongoing supervisory work in this area will likely focus upon the following areas of the CFD & CFD-like Options restrictions:

• Firms’ prudential soundness including their management of negative balance protection.
• Firms’ treatment of clients in the course of Brexit-related restructuring.
• If applicable, the conduct of inward passporting firms operating under the Temporary Permissions Regime.
• Attempts to avoid the effect of the FCA’s new Handbook rules by;

o Inappropriately opting up clients to become elective professional clients.

o Moving clients to associated non-UK entities. 

o Not complying with financial promotion requirements, including the prominence of standardised risk warnings. 

The FCA advises it will also continue to monitor for any harm to retail consumers relating to exchange-traded futures and similar ‘over-the counter’ products. 

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.