The Financial Conduct Authority (FCA) has published a statement addressing their concern that firms may consider ways to circumvent the restrictions imposed by the European Securities and Markets Authority (ESMA) on the provision of contracts for difference (CFDs) and binary options to retail clients. These measures, that have been adopted under Article 40 of the Markets in Financial Instruments Regulation (MiFIR), prohibit the marketing, distribution, or sale of binary options to retail clients; limit the use of leverage; impose the application of a negative balance protection and of a standardised risk warning; and stop the practice of offering monetary and non-monetary benefits to retail investors to induce them to trade. The application of these measures started on 2 July for binary options and on 1 August for CFDs, and will remain in force for an initial period of three months, during which ESMA will consider whether to extend them for a further three months.
The FCA fully support these measures, which in principle are designed to protect retail investors, and announced their intention to work with ESMA and other European regulators to monitor and assess the sale of alternative, speculative products to retail clients. The FCA reminds firms, when considering the marketing, sale, or distribution of alternative products (that can be sold with different labels still exposing the investors to the same risks as CFDs) to pay attention to their conduct of business requirements (e.g. client’s best interests, communications with clients and financial promotions, and suitability and appropriateness) as well as product governance obligations. In relation to similarly complex products, on 30 July ESMA updated the Q&As on its Product Intervention to confirm that turbo certificates are not within the scope of their intervention measures, even though firms are advised to pay special attention to the leverage made available to retail clients, given that turbo certificates have comparable features to CFDs.
At the end of March the FCA stated that it would consult on whether to apply these measures on a permanent basis, however this has not been announced yet. It would be interesting to know, following the application of the restrictive measures on CFDs, how many retail investors are now trading with unregulated brokers or how many of them tried to change their categorisation to become “professional” client, to which the restrictions do not apply. The question of how to balance principle 4 of good regulation (for which customers should take responsibility for their decision) and the consumer protection objective (for which the regulator intervenes to restrict access to certain financial instruments), therefore, remains open.