The rules address harm to retail consumers by making the European Securities and Market Authority’s (ESMA’s) temporary restrictions of contracts for difference (CFDs) sold to retail clients permanent.
For CFDs and CFD-like options sold to retail clients, firms will be required to:
- Limit leverage to between 30:1 and 2:1.
- Close out a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account.
- Provide protections that guarantee a client cannot lose more than the total funds in their CFD account.
- Stop offering monetary and non-monetary inducements to encourage trading.
- Provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.
By including CFD-like options will ensure that firms do not try to avoid our measures by offering closely substitutable products, which we think pose the same risk of harm.
In response to feedback, the FCA have clarified the scope of our CFD-like option restrictions to achieve our intended policy outcome by:
- Excluding firms that sell CFD-like options in other jurisdictions, where the product is sold through an intermediary outside the UK.
- Excluding the sales and distribution activities of EEA firms outside the UK. These firms are still prohibited from actively marketing unrestricted CFD-like options to UK retail consumers.
If intermediaries sell, market, or distribute CFD-like options in or from the UK, they will be subject to FCA rules, meaning UK consumers will be protected.
Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:
'Our intervention follows evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them. We saw firms offering CFDs with increasingly higher leverage, resulting in high proportions of consumers losing money. EU rules are temporary. The new rules maintain and strengthen protections for consumers.'
The rules apply from 1 August 2019 for CFDs and 1 September 2019 for CFD-like options.
Notes to editors
- PS19/18: Restricting contract for difference products sold to retail clients.
- CP18/38: Restricting contract for difference products sold to retail clients and a discussion of other retail derivative products.
- ESMA statement renewing restrictions on CFDs for a further three months from 1 May 2019.
- References to CFDs include financial spread bets and rolling spot forex products.
- CFD-like options includes options that have similar pay-out structure and risk features as CFDs, which are sold under a variety of commercial labels, including turbo certificates, knock outs or delta ones. These products were not included in ESMA’s temporary restrictions that have been in effect since 1 August 2018.
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