FCA imposes bonus ban and leverage cap for CFDs

ESMA - Did they go too far?

The Financial Conduct Authority (FCA) has issued directives today proposing stricter rules for firms selling Contract for Difference (CFD) products to retail customers to improve standards across the sector and ensure consumers are appropriately protected.

The main  changes (listed below) involve a ban on all account opening bonus payments to retail traders, and a hard cap on leverage.

The FCA’s moves come just a week after similar measures were introduced by Cyprus financial regulator CySEC. Cyprus is a major center for Retail Forex and Binary Options brokers.

fcaukContracts for differences, such as spread bets and rolling spot foreign exchange products, are complex financial instruments offered by investment firms, often through online platforms. Following an increase in the number of firms in the CFD market, the FCA has concerns that more retail customers are opening and trading CFD products that they do not adequately understand. The FCA’s analysis of a representative sample of client accounts for CFD firms found that 82% of clients lost money on these products.

The FCA is therefore proposing a package of measures intended to enhance consumer protection by limiting the risks of CFD products and ensuring that customers are better informed. The new measures include:

  • Introducing standardised risk warnings and mandatory disclosure of profit-loss ratios on client accounts by all providers to better illustrate the risks and historical performance of products.
  • Setting lower leverage limits for inexperienced retail clients who do not have 12 months or more experience of active trading in CFDs, with a maximum of 25:1.
  • Capping leverage at a maximum level of 50:1 for all retail clients and introducing lower leverage caps across different assets according to their risks. Some levels of leverage currently offered to retail customers exceed 200:1.
  • Preventing providers from using any form of trading or account opening bonuses or benefits to promote CFD products.

The FCA is also setting out its vision on a range of policy measures for binary bets that would complement existing conduct of business rules, once these products are brought into the FCA’s regulatory scope.

Christopher Woolard, Executive Director of Strategy and Competition said:

We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses. We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products.

The FCA also has concerns that binary bets pose investor protection risks and question whether binary bets meet a genuine investment need.

On-going supervision work by the FCA over the past six years has identified instances of poor conduct across the CFD sector. This includes firms failing to adequately consider if CFDs are appropriate for their customers, failing to provide adequate risk warnings, and firms offering excessive levels of leverage to retail clients.

The FCA has also observed that binary bets are not transparent enough for investors to adequately value them, and have product features which are more akin to gambling products than investments.

The FCA’s proposed measures are intended to ensure an appropriate level of consumer protection. Several EU member states have already introduced restrictions on CFD retail products.

More on the new FCA directives on CFD trading and brokerage can be seen on the FCA website here.

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