ESMA clarifies requirements for CFD risk warnings

Maria Nikolova

The pan-EU regulator explains what it means for a risk warning to be prominent.

MiFID II implementation likely to be set back even further

The European Securities and Markets Authority (ESMA) has today updated its Questions and Answers on ESMA’s temporary product intervention measures on the marketing, distribution or sale of CFDs.

The updated Q&A section provides clarification on the application of the temporary product intervention measures in relation to the prominence of risk warning regarding offering of CFDs to retail clients. The regulator explains how a firm should ensure the prominence of its CFD risk warnings.

Let’s recall that, under Article 2(e) of the CFD Decision, a firm must not send a communication directly or indirectly to a retail client, or publish information accessible by a retail client, relating to the marketing, distribution or sale of a CFD unless it includes the appropriate risk warning complying with certain conditions.

“The risk warning shall be in a layout ensuring its prominence, in a font size at least equal to the predominant font size and in the same language as that used in the communication or published information”.

Also, firms must comply with Article 44 of Commission Delegated Regulation (EU) 2017/5655, which specifies that information addressed to, or disseminated in such a way that it is likely to be received by, a retail client must give a fair and prominent indication of any relevant risks when referencing any potential benefits of an investment service or financial instrument.

In the context of online marketing, giving prominence to the risk warning implies that it is displayed on the relevant webpages in a way that would signal that the message is of importance and makes it unlikely that a client or a prospective client would not to notice it. It should attract attention, for instance, by virtue of its size or position on the webpage.

In deciding whether a particular risk warning is ‘prominent’, firms have to consider the target audience, the characteristics of CFDs and the likely information needs of the average recipient of the communication, ESMA says.

Good practices that indicate firms have given sufficient prominence to a risk warning include:

  • Warnings are shown using easily readable font styles across a neutral background.
  • The size of the warning occupies a noticeable portion of the text displayed, taking into account the content, size and orientation of the communication as a whole.
  • Warnings are contained within their own distinct border, drawing the reader’s attention to them.
  • In the context of web pages, warnings remain fixed on the screen even when the customer scrolls up and down respective web page.
  • Warnings are repeated on linked pages further into the website product chain.
  • In communications other than web pages, warnings are clearly stated within the main body of the communication.

Examples of poor practice that will indicate firms have not given sufficient prominence to a risk warning include:

  • Warnings are obscured through the close proximity of promotional illustrations and/or additional text.
  • Warnings are outside of the main advertisement border.
  • Use of small font sizes and unclear type styles for warnings.
  • Warnings are contained within a ‘pop-up’ box that only appears on the user’s first visit to a website.
  • Warnings are difficult to locate within a website or placed under a separate section or heading that may be overlooked, such as ‘FAQs’, ‘Legal Information’ or ‘Disclaimers’.
  • Firms have not considered the different-sized browsers of consumers when positioning risk information (i.e. it is necessary to scroll down to access the information).
  • Warnings are superimposed across coloured or patterned backgrounds, which lessens their visual impact.

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