ESMA voices concerns about how CFD brokers grant professional status to retail clients

Maria Nikolova

Investment firms are told to refrain from implementing any form of practice that incentivises, induces or pressures an investor to request to be treated as a professional client.

MiFID II implementation likely to be set back even further

The practice of CFD brokerages to grant the so-called “elective professional status” has raised the concerns of the European Securities and Markets Authority (ESMA).

The regulator has today published a statement addressed to providers marketing, distributing or selling contracts for differences (CFDs) to retail clients. The statement is in response to various practices and situations observed in the market, which raise concerns of non-compliance with the legal requirements applicable when providing services to retail clients.

In particular, ESMA has identified undesirable practices related to:

  • Professional clients on request; and
  • Marketing, distribution or sale by third-country CFD-Providers.

ESMA is aware that some CFD providers are advertising to retail clients the possibility to become professional client on request.

“Investment firms should strictly refrain from implementing any form of practice that incentivises, induces or pressures an investor to request to be treated as a professional client. In this respect, any form of promotional language in relation to the status of professional client shall be seen as incentivising a retail client to request a professional client status”, ESMA says.

This includes providing a comparison between leverage limits available to different types of clients and the provision of any form of rewards for becoming a professional client.

The regulator is also aware that some third-country firms are marketing CFDs that do not comply with ESMA’s measures to retail clients in EU, particularly through online advertising, and that EU firms are engaged in activities that are intended to circumvent ESMA’s temporary product intervention measures. ESMA notes that firms should not incentivise retail clients to start trading with an intra-group firm established in a non-EU jurisdiction. Furthermore, information in relation to the ‘benefits’ of trading CFDs with such an intra-group third-country entity could be seen as a circumvention of ESMA’s product intervention measures by the EU authorised firm.

Let’s note that, when the Financial Conduct Authority (FCA) announced the CFD restriction measures for the UK, it mentioned the “elective professional status” among areas of supervision focus. The UK regulator said its supervisory work in the CFD offering segment will likely focus on the following areas of the restrictions:

  • Firms’ prudential soundness including their management of negative balance protection.
  • Firms’ treatment of clients in the course of Brexit-related restructuring.
  • If applicable, the conduct of inward passporting firms operating under the Temporary Permissions Regime.
  • Attempts to avoid the effect of the new Handbook rules by:
  • Inappropriately opting up clients to become elective professional clients.
  • Moving clients to associated non-UK entities.
  • Not complying with financial promotion requirements, including the prominence of standardised risk warnings.

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