FCA consults on permanent restrictions for CFD offering to retail clients, ban on binary options

Maria Nikolova

The proposed measures go beyond the temporary restrictions introduced by ESMA, as they are set to apply to a wider range of products.

The UK Financial Conduct Authority (FCA) has earlier today published two consultation papers, outlining proposals for permanent measures for the offering of CFDs and binary options to retail clients.

Let’s note that although the FCA proposals are, in their essence, the same as the European Securities and Markets Authority’s (ESMA) existing, EU-wide temporary restrictions on these products, they differ in some important aspects. First off, the proposed measures by the UK body are set to be permanent. Second, the restrictions would apply to a wider range of products.

Regarding contracts for difference (CFDs), the FCA is proposing to intervene in this market to address poor conduct by UK and EEA firms that offer CFDs to retail consumers, and to limit the sale of CFDs and similar products with excessive risk features that result in harm to retail consumers.

The FCA is proposing permanent rules 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, and
  • provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.

Let’s note that the FCA is proposing to extend the rules to closely substitutable products, including so-called turbo certificates. The regulator is also envisaging 30:1 leverage limits for CFDs referencing certain government bonds (compared to 5:1 under ESMA’s measures).

The FCA estimates that these proposals could reduce annual losses for retail customers of UK firms by between £267.4 million to £450.7 million per year.

The CFD consultation paper also discusses and seeks feedback in Chapter 4 on whether other complex derivative products, such as futures or similar over-the-counter (OTC) products, may pose similar risks of harm to retail consumers and could benefit from similar rules.

Regarding binary options, the FCA has significant concerns about investor protection from the sale of binary options to UK retail consumers. This is based on evidence of aggressive and/or misleading marketing of these products, their inherent complexity and lack of transparency, and the level (and speed) of retail consumer losses experienced when trading binary options.

While this CP proposes making ESMA’s temporary product intervention permanent, the UK domestic ban will also include ‘securitised binary options’ as defined by ESMA, which it excluded from its measures. In the FCA’s view, these products pose similar investor protection concerns as other types of binary options sold to retail consumers.

A permanent ban on binary options could save retail consumers up to £17 million per year, the FCA estimates.

The binary options Consultation Paper is open until February 7, 2019. The CFD Consultation Paper is open until February 7, 2019 for feedback on the proposed measures and March 7, 2019 for feedback on the discussion of other complex derivative products.

The FCA will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers. This follows the commitment made in the UK Cryptoasset Taskforce Final Report published in October 2018.

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