FCA to focus on firms’ management of negative balance protection in line with CFD restrictions
The UK regulator will seek to detect attempts by firms to avoid the effect of the new CFD rules, as some firms might try to inappropriately opt up clients to become professional clients.
The FCA is requiring firms that offer CFDs and CFD-like options to retail consumers to:
- Limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset.
- 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 trading account.
- Stop offering current and potential customers cash or other inducements to encourage retail consumers to trade.
- Provide a standardised risk warning, telling potential customers the percentage of the firm’s retail client accounts that make losses.
- The proposed interventions are the same in substance as ESMA’s, although the FCA is also proposing to apply its rules to closely substitutable products (the measures for CFDs will thus be applied to CFD-like options).
Following feedback to the Consultation Paper from December 2018, the FCA has amended its rules to:
- Clarify the scope of products, activities, and firms caught by the rules.
- Clarify the methodology for the standardised risk warning, and the ban on monetary and non-monetary benefits.
- Exclude certain sales activities for CFD-like options.
The regulator expects firms to comply with these restrictions. Its supervisory work in this area 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.
The FCA says it will continue to monitor for any harm to retail consumers relating to exchange-traded futures and similar ‘over-the counter’ products.