ESMA, the European financial regulatory body, has published this morning a Call for Evidence on potential product intervention measures relating to the provision of contracts for differences (CFDs), including rolling spot forex, and Binary Options (BOs) to retail investors. This consultation comes after one month after ESMA published a statement about their intention to use some product intervention powers under Article 40 of MiFIR, to address concerns in relation to CFDs and BO offered to retail clients.
ESMA is seeking feedback from stakeholders in the industry on the impact of the measures they are proposing, which for CFDs include limiting leverage, introducing a margin close-out rule on a position by position basis and the negative balance protection policy as well as restrictions on benefits for incentivising trading and a standardised risk-warning with the indication of the percentage range of losses incurred by retail clients from previous quarters (in a kind of cigarette packet-style). In relation to BOs, ESMA is considering a prohibition on the marketing, distribution or sale of binary options to retail clients. The option of applying the restrictions to professional clients is not under consideration due to the lack of evidence of harm to this type of client.
Firms involved in the sale, distribution or marketing of CFDs and/or BOs are invited to provide any qualitative information and especially any quantitative information they may have. ESMA will consider responses received to the ten questions included in the document by 5 February 2018.
Whilst it is important for stakeholders in the industry to circulate their view, there are also a few points to consider. Looking at the wording of article 40, it is clear that these powers are temporary in nature where these below conditions can be fulfilled:
- a) the proposed action addresses a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or commodity markets or to the stability of the whole or part of the financial system in the Union;
(b) regulatory requirements under Union law that are applicable to the relevant financial instrument or activity do not address the threat;
(c) a competent authority or competent authorities have not taken action to address the threat or the actions that have been taken do not adequately address the threat.
(a) does not have a detrimental effect on the efficiency of financial markets or on investors that is disproportionate to the benefits of the action; and
(b) does not create a risk of regulatory arbitrage.
Is this the case? It will be interesting to see how ESMA can satisfy that all these conditions are in place and that the proposed measures are appropriate and proportionate. These measures, in fact, are not meant to be “temporary” or to be reviewed at least every three months, as indicated in part 6 of the article 40.
This consultation comes a few weeks after the introduction of MiFID II, whose provisions aim to address concerns about investor protection and awareness. Should ESMA confirm the suggested restrictions, there would not be time for rules like on product governance, information on costs and charges, appropriateness, inducements and conflict of interests (which also include remuneration schemes for sales persons), amongst others, to fix the problems. Only one week ago, furthermore, the FCA published a Dear CEO Letter to providers and distributors of CFDs.
The consultation is open only for a short time, which is an additional indication of the “urgency” of the matter and of the need for appropriate measures to be taken.
To find out more about the issues raised in this blog post or to discuss how your firm could contribute to the consultation, please do not hesitate to contact us.