FCA Holds Off Retail Rule Change as ESMA Considers Stronger Intervention

Following an announcement from the European Securities and
Markets Authority (ESMA) that it is considering exercising its product
intervention powers to address its concerns over the use of contracts for
difference (CFD), rolling spot FX and binary options contracts by retail
traders, the UK’s Financial Conduct Authority (FCA) says it will delay its own
rules on the products.

In a statement, ESMA says it has been concerned about the
provision of speculative products such as CFDs, rolling spot FX and binary
options to retail investors for a “considerable period of time” and has
conducted ongoing monitoring and supervisory convergence work in this area.

The authority has published a number of Q&As on CFDs and
other speculative products to foster supervisory convergence, and established a
CFD Task Force in July 2015. It also issued an investor warning on the sale of
CFDs, binary options and other speculative products in July 2016.

ESMA says, however that it remains concerned that these
supervisory convergence tools may not be sufficiently effective to ensure that
the risks to consumer protection are sufficiently controlled or reduced. “ESMA
is therefore discussing the possible use of its product intervention powers
under Article 40 of MiFIR to address investor protection risks in relation to
CFDs, rolling spot forex and binary options,” it says in a statement.

The authority says it is also discussing the possible
content of any such measures, and how they could be applied. “However, ESMA can
confirm that the measures being discussed for (i) CFDs and rolling spot forex
and (ii) binary options include proposals that take into account a number of
measures that have been adopted or publicly consulted on by EU National
Competent Authorities,” it states. “These measures include leverage limits,
guaranteed limits on client losses, and/or restrictions on the marketing and
distribution of these products.”

In accordance with Article 40 of MiFIR, any intervention
measures must be approved by the ESMA board of supervisors and can only come
into effect from 3 January 2018 at the earliest.

Because of this, and in response to the ESMA statement, the
UK’s FCA is delaying its own imposition of rules surrounding these contracts
that were first
in December 2016.

“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,” the FCA says in a statement. “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.”

The FCA also notes that ESMA is further discussing
additional measures not consulted on in the FCA’s CP16/40, including guaranteed
limits on client losses. It says it 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,” it adds, however.

FCA also says that during ESMA’s product intervention process,
it 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.”


Twitter @lamboPnL


Colin Lambert

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