FCA delays FX and CFD leverage rules after ESMA decides to review the industry

ESMA - Did they go too far?

UK regulator the Financial Conduct Authority (FCA) has dropped another bombshell.

fca-logo-newAfter shocking the Forex and CFD brokerage sectors in December with surprise proposals to rein in leverage and bonus payments to retail clients, the FCA today announced that it will be delaying the finalization of its proposals now that pan-European regulator ESMA announced that it itself is reviewing the leveraged trading sector.

ESMA announced earlier this morning that it is planning its own pan-European rules for Forex and CFD trading, which could include a leverage cap, negative balance protection, stop losses on leveraged CFDs, or even limits on advertising which it may try to implement across the EU. Which, the FCA is unlikely to be a part of soon anyway, once Brexit becomes a reality.

In any event, the FCA stated that it will wait for the time being to see what ESMA comes up with. It is likely to want to have its own rules in sync with those in Continental Europe.

The FCA also stated that it would reconsider making final rules at a domestic level in the first half of 2018.

As we wrote earlier, the FCA received an absolute ton of industry and trader feedback when its consultation process closed in early March – certainly more than it expected. Most of that feedback, especially from some of the publicly traded brokers affected such as IG Group Holdings plc (LON:IGG), CMC Markets Plc (LON:CMCX), Plus500 Ltd (LON:PLUS), and London Capital Group Holdings plc (LON:LCG) was focused on relaxing the hard 50x leverage cap the FCA had proposed.

The FCA’s full statement on the matter reads as follows:

FCA statement on contract for difference products and CP16/40

Statements Published: 29/06/2017

This statement provides an update on the Financial Conduct Authority’s (FCA) policy work on contract for difference products (CFDs) and CP16/40: Enhancing conduct of business rules for firms providing contract for difference products to retail clients.

This follows the announcement(link is external) made today by the European Securities and Markets Authority (ESMA) on its consideration of product intervention measures under Article 40 of the Markets in Financial Instruments Regulation (MiFIR). ESMA’s product intervention powers can only come into effect from 3 January, 2018 at the earliest.

Given progress in ESMA’s own consideration of the use of its product intervention powers in this area, the FCA has decided to delay making final conduct rules for UK firms providing CFDs to retail clients, pending the outcome of ESMA’s discussions.

ESMA has confirmed that the measures being considered take into account requirements that have been adopted or publicly consulted on by EU National Competent Authorities (NCAs). As such, some of the measures under discussion at ESMA are broadly similar in nature to those proposed by the FCA in CP16/40, including leverage limits. ESMA is also discussing additional measures not consulted on in CP16/40, including guaranteed limits on client losses.

As indicated by ESMA, the precise nature of the measures for each category of products is still being discussed. Any decision to use product intervention powers under Article 40 of MiFIR would need to be approved by ESMA’s Board of Supervisors.

The FCA will continue to engage with ESMA to support the development of measures that promote a consistent level of investor protection across the European Union.

In the event of a significant delay to possible ESMA measures, the FCA would reconsider making final rules at a domestic level in the first half of 2018.

As we monitor the progress of ESMA’s product intervention process, the FCA will conduct further policy work in light of consultation feedback. We expect this to include a further request for additional data from a sample of UK firms over the coming months. Information received during the consultation period suggests that lower leverage is associated with better client outcomes across a number of firms. However, more detailed and comparable firm data are required to provide clarity on the impact of different factors on individual client outcomes. These data and analysis are intended to inform any future policy decisions, and provide a basis on which we can evaluate the impact of any prospective rules.

The FCA will continue its focus on the sector through its on-going programme of supervisory work. The FCA has published a statement on the outcome of its further review of appropriateness tests on its website today as a follow up to its Dear CEO letter in February 2016. We also expect to publish the outcomes of thematic work on CFD intermediaries in the near-future.

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