FCA voices concerns over products resembling CFDs as new ESMA rules get into effect

Maria Nikolova

The UK regulator is concerned that firms may try getting around ESMA’s measures by selling other similarly complex products to retail clients.

As the new ESMA rules for offering CFDs to retail clients come into effect, the UK Financial Conduct Authority (FCA) has voiced its concerns that some firms may actually try to get around the new restrictions by offering investment products that resemble CFDs.

In a statement, issued earlier today, the UK regulator said it fully supported ESMA’s measures, which are aimed at protecting retail investors. And yet, the FCA said it was aware that other products can create the same kinds of risks to consumers as CFDs, particularly where they expose the investor to significant leverage.

ESMA’s most recent Q&A update on its product intervention also highlighted these risks. These substitute products could be sold under a variety of labels but share common features with CFDs and these features may cause large trading losses to retail clients.

ESMA made it clear earlier this week that firms “should pay particular attention to the leverage made available to retail clients and consider whether the product is offered on terms that act in the best interests of the client” for products that have comparable features to CFDs, such as Turbo Certificates.

However, ESMA noted that the product intervention measures do not apply to turbo certificates, as they have, unlike CFDs, all of the following features:

  • Turbo certificates are not margined products and the investor cannot change the leverage of the turbo certificate by adding margin to or detracting margin from a specific trading account. Investors buy the turbo-certificate and are charged transactional fees, for entering the contract;
  • Turbo certificates do not have a contingent liability for the retail client. In other words, after the purchase of the product, the retail client has no possibility of being liable for a further payment when the transaction is completed or the position is closed (other than commission, transaction fees or other related costs);
  • Turbo certificates qualify as a transferable security as defined in Article 4 (1) (44) (c) of MiFID; and
  • Turbo certificates are typically listed and traded on a regulated market or MTF, which includes additional transparency requirements.

With regard to this type of products, the FCA states:

“We will therefore work with ESMA and other European regulators to monitor and assess the sale of these alternative, speculative products to retail clients. If we have evidence that these products are causing similar harms, we will work with ESMA and will, if necessary, support further action to extend the scope of its intervention”.

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