Central Bank of Ireland proposes ban on sale and distribution of CFDs

Maria Nikolova

The proposed measures include an outright ban on the sale and distribution of CFDs to retail clients in Ireland or restrictions aimed at protecting investors.

The Central Bank of Ireland has today joined the growing group of regulators seeking to curb the distribution of high-risk financial instruments.

The Central Bank has published a Consultation on the protection of retail investors in relation to the distribution of CFDs. One of the options outlined in the document is the prohibition of the sale or distribution of CFDs to retail clients in and from Ireland. Another is the implementation of enhanced investor protection measures.

The regulator states that a prohibition on the sale or distribution of CFDs to retail clients could have the greatest impact in terms of limiting investor losses. This measure, which is in itself rather radical, will be accompanied by curbs of marketing of CFDs.

The less harsh option – the one for enhancing investor protection measures, affects:

  • Leverage Limit – a maximum leverage limit of 25:1 (4% initial margin) is poised to be set for retail clients trading all financial CFDs;
  • Negative Balance Protection – in order to curb the possibility of clients losing more than they have deposited into their CFD trading accounts and noting that such losses are potentially limitless, it is proposed that firms will be required to provide negative balance protection (a guaranteed stop loss) to all retail clients on a per-position basis;
  • Bonuses and other Promotions – in order to stop their widespread misuse, it is proposed that firms will be prohibited from offering any form of trading incentives or account opening bonuses to retail clients in respect of CFD accounts;
  • Risk Disclosure – All firms offering CFDs to retail clients are set to be required to prominently display a standardised risk warning with details of the profit-loss ratio of retail CFD clients over the previous calendar quarter and also over the previous 12-month period.

The Central Bank of Ireland refers to a review of a sample of the largest CFD providers in Ireland, which has found that in the two-year period up to 31 December 2016, 74% of retail clients lost money with an average loss of €2,700.

The Consultation is open until May 29, 2017.

The proposals by the Central Bank of Ireland are released just as the deadline for submitting comments on the CFD Consultation by the UK Financial Conduct Authority (FCA) is approaching. The FCA is also proposing stricter rules for CFD distribution to retail clients, including a limit on leverage.

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