Following the publication by the Financial Conduct Authority (FCA) on 1 July of the final rules on the restriction of how Contracts for Difference (CFDs) and CFD-like options are sold, marketed, and distributed to retail consumers, on 2 July the European Securities and Markets Authority (ESMA) published an opinion, in which it concludes that overall the measures taken are justified and proportionate, with the exception of:
- Not applying sales and distribution restrictions to CFD-like option providers authorised in other EEA Member States other than a UK branch or tied agent;
- Setting leverage limits for CFDs referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures);
- Taking product intervention measures that are less stringent as ESMA’s measures.
In relation to the application of the restrictions on CFD-like options to all providers marketing those products in or from the UK and to UK providers/UK branches of EEA providers distributing or selling those products in or from the UK, ESMA considers that the proposed distinction does not adequately address the consumer detriment which the FCA has observed for UK retail clients in respect of CFD-like options. This distinction, in fact, would still permit UK retail clients to trade CFD-like options with providers established in other Member States and experience significant losses.
The FCA responded that, under final rules, UK retail clients will be able to continue to open accounts to trade unrestricted CFD-like options with product providers established in other EEA Member States (other than through a UK branch or tied agent), provided that these providers have not actively marketed the products in the UK. The FCA did not think it would be proportionate, practical, or effective to seek to apply our rules to overseas firms not supervised by the FCA and subject to different rules in their own jurisdiction.
With regard to the proposed leverage limit of 30:1 for CFDs referencing certain government bonds, the FCA has observed that these instruments are predominantly used by UK retail clients for hedging purposes. UK firms have said to the FCA that retail clients have complained that the leverage limit of 5:1 is disproportionate, given that the main government bonds are less volatile than most major FX pairs, and that retail clients tend to use these products with hedging purposes when compared to CFDs with different underlying assets. ESMA’s concern is that the proposed leverage limit would result in divergence from the leverage limits applied by product providers subject to other national measures. ESMA specifies that, in their view, the proposed leverage limit for CFDs referencing certain government bonds may result in divergence from the leverage limits applied by product providers subject to other national measures. The FCA, however, indicated that UK firms will need to limit leverage to 5:1 for CFDs referencing certain government bonds when selling CFDs to retail clients from EEA jurisdictions that have adopted the same rules as ESMA.
The FCA has observed that the percentages of loss-making CFD retail client accounts disclosed by UK providers through the provider-specific risk warnings in ESMA’s measures have been both higher and lower than the percentage range in the standard risk warnings of ESMA’s measures. Therefore, the FCA considers that such percentage range is not entirely appropriate for the UK.
In respect of the proposed amendments to the standard risk warnings, ESMA considers that its measures have been used as the basis for the national measures of other national competent authorities (NCAs). Therefore, any differences in the national measures may lead to additional costs for CFD providers that would have to adjust the relevant risk warnings when offering CFDs in or from the UK. ESMA encourages NCAs, including the FCA, to take measures that use a common Union risk warning to avoid such costs.
ESMA’s main point is that the significant investor protection concern raised by the offer of CFDs to retail clients is a cross-border issue, and that to effectively address the significant investor protection concern and avoid the risk of regulatory arbitrage, it is essential that product providers cannot exploit differences in treatment by NCAs across Member States. The FCA rules, instead, seem to make a clear mark in taking measures that only address domestic concerns. This appears consistent with the approach to regulation that the FCA announced a few months ago, and with a post-Brexit scenario whereby EU and UK approaches to regulation are notably different.