The Financial Conduct Authority (FCA) is set to extend the retail market ban of contract for differences (CFDs) and binary options, which was proposed by pan-European regulator ESMA earlier this year, to include "closely substitutable products".
In March, ESMA introduced a number of EU-wide temporary measures for the provision of CFDs, including a ban on the sale or marketing of binary options to retail investors.
Following a consultation as announced in January, the pan-European regulator introduced leverage limits and negative balance protection on CFDs, while also banning the marketing, distribution or sale of binary options to retail clients and restricted sales to retail clients of CFDs, including rolling spot forex and financial spread bets.
CFDs are contracts between an investor and an investment bank or a spread-betting firm, which see the parties exchange the difference between the opening and closing prices of a specified financial instrument at the end of the contract. Concerns have been raised in recent years about their suitability for the retail market.
The FCA's latest proposals are identical to those outline by ESMA, specifically:
- Prohibition on the marketing, distribution or sale of binary options to retail clients; and
- Restrictions on the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex and financial spread bets.
However, the FCA is now also proposing to apply its rules to "closely substitutable products", including so-called "turbo certificates".
For CFDs sold to retail clients, the FCA is proposing to require firms to:
- limit leverage to 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 funds fall to 50% of the margin needed to maintain their open positions on their CFD account
- 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
- provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses
The FCA said its proposals, which would take immediate and permanent effect if confirmed, were in order to tackle widespread concerns about "the inherent risks of these products, and the poor conduct of the firms selling them".
It explained the products have "led to harm to consumers in the UK and internationally through large and unexpected trading losses".
The regulator estimates that the proposals for CFDs could reduce annual losses for retail consumers of UK firms by between £267m to £451m per year.
Meanwhile, according to the FCA, a permanent ban on binary options could save retail consumers up to £17m per year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products.
Elsewhere, the FCA is also consulting on whether other complex derivative products, such as futures or similar over-the-counter products, may pose similar risks of harm to retail consumers and could benefit "from similar rules".
Commenting on the proposals, executive director of strategy & competition at the FCA Christopher Woolard (pictured) 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."
Both the CFD and binary options consultation papers are open for comment until 7 February, while feedback on the discussion of other complex derivative products will be open until 7 March.
The FCA also announced it will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers, following the findings of the October UK Cryptoasset Taskforce Final Report.
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