Contract for difference Consultation Paper: Improving the conduct of business regime

On 6 December 2016, the FCA published a Consultation Paper (CP16/40), which outlines their concerns about the increasing evidence of poor conduct of firms providing contract for difference (CFD) products to retail clients and the increased risks to investor protection.

In addition, the FCA also proposed measures on the sale and distribution of bets on binary options, which are expected to fall in to the scope of FCA regulation after the implementation of MiFID II. ESMA has provided guidelines in this area previously and established a CFD taskforce in Q3 2015 to analyse common issues across the EU in regard to CFD trading and published a number of Q&A papers and warnings highlighting key risks. 

The ESMA papers identify certain key aspects that the EU regulators should take into account when assessing CFD firms or firms offering other speculative products to retail clients:
  • group structure, ownership and close links;
  • outsourcing arrangements;
  • conflicts of interest;
  • remuneration;
  • clarity of information and disclaimers on website;
  • marketing communications and financial promotions;
  • appropriateness;
  • suitability;
  • standards for the prevention off financial crime; and
  • proportionality of leverage.
The FCA is aware that more than 80% of investors in the CFD retail business lose money on these products, however this is not in itself a key issue. The main concern is improving the conduct regime to ensure that CFD firms make retail investors fully aware of the risks involved in leveraged CFD trading and establish early warnings and proportionate limits on leverage.

The summary below identifies some of the key points raised by the FCA that CFD firms should consider:
  1. Enhanced disclosure  CFD firms will need to issue risk warnings, including a mandatory profit-loss disclosure, to better illustrate the risks and historical performance of CFD products, including a percentage of loss-making clients.
  2. Capped leverage limits  leverage will need to be applied in a flexible and proportionate way to different types of clients based on their experience with CFD trading, with a maximum of 25:1 for inexperienced retail clients and up to 50:1 for more active retail investors.
  3. Ban on bonus offers  the FCA intends to prohibit firms from promoting CFD products to retail clients using bonus offers or any other incentives to open accounts or trade.
It is expected that binary bets will be brought inside the FCA’s regulatory perimeter with the transposition of MiFID II and there are initial proposals to impose a restriction on marketing binary bets to certain retail clients. 

From a broader perspective, other European regulators have already taken action in many of these areas. For instance, CYSEC released a Circular following the tenets of ESMA’s guidelines, and bans on the promotion of binary bets have already been adopted in France and Belgium.

Moore Stephens has provided regulatory assistance to a number of CFD firms and will be able to advise firms in scope of the Consultation Paper on the best plan of action to be prepared for the new requirement.

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