Restrictions on high-risk financial contracts for difference take effect

Out-Law News | 08 Aug 2018 | 4:00 pm | 1 min. read

EU-wide temporary restrictions on the sale, marketing and distribution of high-risk speculative investment contracts for difference (CFD) products to retail investors have now taken effect, from 1 August 2018.

The European Securities and Markets Authority (ESMA) finalised temporary product intervention measures targeting CFDs in June 2018. They include a ban on CFD providers offering certain incentives to retail customers, a standardised risk warning and leverage limits. ESMA also imposed a temporary ban on the marketing, distribution or sale of so-called 'binary options' to retail investors, which took effect on 2 July 2018.

The measures have been adopted by ESMA using its product intervention powers under article 40 of the Markets in Financial Instruments Regulation (MiFIR), which enables ESMA to introduce temporary intervention measures on a three monthly-basis. ESMA will review the measures within three months of them taking effect and can extend the measures for a further three months if necessary.

In June, ESMA chair Steven Maijoor described the measures as "a significant step towards greater investor protection in the EU".

"The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors," he said. "ESMA's prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product."

CFDs are complex financial instruments often offered by firms through online platforms. They include the likes of spread bet and rolling spot foreign exchange products. They effectively enable investors to bet on the extent to which the value of an underlying asset, such as equity shares or foreign exchange rates, will rise or fall.

In the UK, the Financial Conduct Authority (FCA) had previously proposed similar restrictions on CFDs. In a statement, the FCA  said "we fully support" ESMA's current measures, and warned regulated firms against attempts  for "getting around" the new rules "by selling other similarly complex products to retail clients" instead.

The FCA said in its statement: "ESMA's Q&A (14-page / 143KB PDF) [on the new measures] makes clear that firms 'should pay particular attention to the leverage made available to retail clients and consider whether the product is offered on terms that act in the best interests of the client' for products that have comparable features to CFDs, such as Turbo Certificates."

"We will therefore work with ESMA and other European regulators to monitor and assess the sale of these alternative, speculative products to retail clients. If we have evidence that these products are causing similar harms, we will work with ESMA and will, if necessary, support further action to extend the scope of its intervention," the FCA said.