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Screenshot of a breaking news alert e-mail from Q2 2017
Breaking Forex News… Ireland has become the latest country to crack down on leveraged Forex and CFD trading.
The Central Bank of Ireland (CBI), which also acts as the country’s financial regulator, has announced that is has published a consultation paper on distribution of CFDs, which include in its definition leveraged Forex pairs trading.
The consultation indicated two main avenues that the CBI is considering:
- The prohibition of the sale or distribution of CFDs to retail clients in and from Ireland altogether; or
- The implementation of enhanced investor protection measures including a limitation on leverage and a requirement that retail clients may not lose more than the amount deposited on a per-position basis, i.e. negative balance protection.
The CBI will be taking feedback from all interested parties until May 29, 2017.
The CBI’s move matches similar proposals and rules impositions made recently by other European regulators:
- United Kingdom – the FCA has issued proposals banning bonus payments to retail clients, and limiting Forex and CFD leverage to 50x. Feedback on the FCA’s proposals are due tomorrow, March 7.
- Cyprus – CySEC has banned bonus payments, and limited introductory leverage to 50x (with higher leverage allowed for experienced traders).
- Germany – BaFin requires negative balance protection.
- France and Holland – advertising ban on leveraged products.
- Belgium – total ban on leveraged trading products.
According to the CBI, a study it undertook found that 75% of retail clients who invested in CFDs during 2013 and 2014 made a loss, of which the average loss was €6,900. It was observed that retail clients generally were not sufficiently aware of the high risk and complex nature of the product. The CBI concluded that CFDs are not suitable for investors who have a low risk appetite due to the volatile nature of the CFD market, coupled with the potential for the consumer to lose more than the initial investment.
A recent follow-up review by the CBI of a sample of the largest CFD providers in Ireland found that in the two-year period 2015-2016, 74% of retail clients lost money with an average loss of €2,700. Studies of client data conducted in other European jurisdictions have found similarly high levels of client losses.
Other than affecting foreign brokerages targeting Irish retail clients, the new proposals (if adopted) will create problems for Ireland based brokers serving clients abroad, with the CBI stating clearly that its rules will apply to retail clients in and from Ireland.
The largest Ireland-based retail Forex and CFD broker is AvaTrade, which has most of its operations in Israel but operates under a CBI license.
Director of Asset Management Supervision at the CBI Michael Hodson said:
CFDs are complex products which are widely advertised to the retail mass market in an online setting. It is timely for the Central Bank to take further and decisive action in relation to CFDs given the evidence that the probability of loss for consumers is very high. This work builds on previous work in this area and proposes stronger protections for consumers.
The full Central Bank of Ireland consultation paper can be seen here (pdf).