On the 29th of June, the FCA published a statement in relation to the consultation paper published in December 2016 titled “Enhancing conduct of business rules for firms providing contract for difference products to retail clients” (CP16/40). CP16/40 set out a series of proposed measures to improve investor protection for retail investors tempted to invest in contracts for difference (CFDs), including the limitation and variation of leverage with a maximum of 50:1 for experienced clients and the ban of bonuses to promote CFDs products.
A policy statement was expected by the end of June, instead the FCA announced that it will delay making final rules on CFDs in the light of a public statement by the European Securities and Markets Authority’s (ESMA) published on the same day wherein ESMA notes its preparatory work in relation to consideration of product intervention measures for CFDs, binary options and other speculative products.
MiFIR Article 40 permits ESMA to temporarily prohibit or restrict the marketing, distribution or sale of certain instruments to address investor protection risks. Any intervention measures must be approved by the ESMA Board of Supervisors, therefore it can only come into effect on or after 3 January 2018 when MiFID II and MiFIR are in force.
The FCA has stated that will continue to engage with ESMA to support investor protection across the European Union. In the event of a significant delay by ESMA, the FCA would reconsider making final rules at a domestic level in the first half of 2018.
On that same day, the FCA also published the results of their review of appropriateness assessments for sales of CFDs through a sample of 23 firms. This was a follow up review to the “Dear CEO letter”, issued in February 2016.
The FCA notes that firms failed to meet expectations on appropriateness assessment, as prescribed in COBS 10 on assessing appropriateness for non-advised services. Key areas of concerns still remain:
- Insufficient account of clients’ previous transactional experience
- Inadequate assessments of prospective clients’ knowledge
- Inadequate risk warnings to prospective clients who fail appropriateness assessments
- Failure to evaluate whether failed applicants should be allowed to make CFD transactions
- Poor oversight, weak controls and inadequate management information
As such, the FCA continue to have serious concerns about the distribution of these complex, speculative products and the quality of firms’ policies and procedure for client on-boarding. It will, therefore, consider enforcement investigations or other actions as necessary.
In light of the new obligations introduced by MiFID II, firms are encouraged to review their practices and compliance with product governance requirements.