The UK’s Financial Conduct Authority (FCA) has issued two consultation papers ahead of the imposition of rules to address what it terms “harm to retail consumers from the sale of certain complex derivative products”, specifically retail –orientated contracts for difference (CFDs) and binary options.
The proposed rules would apply to firms acting in or from the UK and ban the sale, marketing and distribution of binary options, as well as restrict the sale, marketing and distribution of CFDs and similar products to retail customers.
The FCA says it is acting “to tackle widespread concerns about the inherent risks of these products, and the poor conduct of the firms selling them”, adding that this has led to harm to consumers in the UK and internationally through large and unexpected trading losses.
The proposed interventions are the same in substance as the European Securities and Markets Authority’s (ESMA) existing, EU-wide temporary restrictions on these products, although the FCA is also proposing to apply its rules to closely substitutable products, including so-called turbo certificates.
If confirmed the FCA’s rule changes would have permanent effect.
For CFDs sold to retail clients, the FCA is proposing to require firms to limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides. Firms will also be expected to 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.
Firms selling CFDs will also be required to 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; and provide a standardised risk warning, which requires them to tell potential customers the percentage of their retail client accounts that make losses.
The FCA says it estimates that the proposals for CFDs alone could reduce annual losses for retail consumers of UK firms by between £267.4m to £450.7m. A permanent ban on binary options could save retail consumers up to £17m per year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products, it adds.
“We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products,” says Christopher Woolard, executive director of strategy & competition at the FCA. “This is despite focused supervisory work over several years to try and improve firms’ conduct. [These] proposals will enhance consumer protection by banning binary options and ensuring CFDs are only marketed and sold to consumers who understand the risks from trading these types of products.”
The CFD consultation also seeks feedback on whether other complex derivative products, such as futures or similar OTC products, may pose similar risks of harm to retail consumers and could benefit from similar rules, or if this would have unintended effects.
Both consultations are open until 7 February 2019, however the CFD consultation is also open until 7 March 2019 for feedback on the discussion of other complex derivative products.
The FCA says it will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers. This follows the commitment made in the UK Cryptoasset Taskforce Final Report published in October 2018.