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.

Read this next

Retail FX

Weekly Roundup: John Oliver rips into MetaTrader, Binance to pay $10 billion

Welcome to this week’s roundup, where we delve into the latest developments in the Forex, Fintech, and cryptocurrency markets. Stay ahead of the curve with our comprehensive overview of the week’s most impactful events and trends across these dynamic sectors.

Retail FX

Lark Funding reopens to US traders, MyFundedFX picks cTrader

Canada-based prop trading firm Lark Funding announced it will once again welcome clients from the United States.

Institutional FX

Cboe FX volume falls to lowest level since summer

Cboe’s institutional spot FX platform, known as Cboe Spot, today announced its trading volume for the month ending February 2024, which took a step back after a strong rebound in December.

Retail FX

ThinkMarkets secures lucrative DFSA license in Dubai

Melbourne-based broker ThinkMarkets has secured a license from the Dubai Financial Services Authority (DFSA) after it has already incorporated its new subsidiary in the Dubai International Financial Center (DIFC).

Digital Assets

New Horizen Lays Out Its Vision Of A Modular, Proof Verification Layer For Web3 Networks

Horizen is forging a new path for the future of blockchain with its New Horizen initiative, which is building a modular Proof Verification layer that’s dedicated to verifying cryptographic proofs for any settlement layer, beginning with Ethereum. 

Digital Assets

Karma3 Labs Raises a $4.5M Seed Round Led By Galaxy and IDEO CoLab to Build OpenRank, a Decentralized Reputation Protocol

Using OpenRank, developers and web3 companies can build consumer apps where people can discover, use, fund, read, or buy something on-chain without worrying about getting spammed or scammed.

Digital Assets

Worldcoin down as Elon Musk sues OpenAI CEO Sam Altman

Worldcoin’s (WLD) token dropped following news of a lawsuit against related company OpenAI. The lawsuit was filed by Elon Musk and accused OpenAI and CEO Sam Altman of breach of contract.

Institutional FX

Exegy’s Liquidity Lamp adds intraday data to outperform S&P 500 by 31.8%

Exegy has incorporated intraday signals into its AI-powered iceberg order detection tool, Liquidity Lamp. By adding intraday data to a baseline mean reversion strategy, Exegy’s model outperformed the baseline by 10.5% and the S&P 500 (SPY) by 31.8%, respectively in the out-of-sample testing.

Industry News

Think Elon Musk backed your crypto exchange? ASIC’s latest reveal may shock you

In an absolutely shocking turn of events that nobody could have possibly seen coming, the Australian Securities and Investments Commission (ASIC) has bravely stepped forward to reveal that, yes, those videos of Elon Musk passionately endorsing a cryptocurrency exchange are as fake as a three-dollar bill.

<