In relation to CFDs, the FCA acknowledged that their measures are mostly identical to those that ESMA introduced by way of temporary product intervention measures some months ago.
Our quick thoughts as follows
-
Many providers will be disappointed that the FCA did not follow through with their earlier proposals in relation to "experienced" clients.
-
The FCA is clearly regulating "implied leverage" in what appears to be a bid to tackle avoidance mechanisms. However, the examples given could be clearer!
-
The FCA appears clear that CFD trading should not be financed through collateralised assets. This is an emotive subject and the FCA has asked for feedback on this.
-
Unfortunately there is limited detail on the margin close out rule which is more complicated in practice than the FCA is suggesting. The rules do not make it clear the extent to which firms may exercise discretion around requiring additional margin (in relation to in-flight transactions) or initially.
-
Importantly, the FCA is closely focussing on the provision of leveraged futures but appreciates the complications in doing so – this area will see intense feedback and scrutiny over the next few months.
-
We have a new proposed defined Handbook term - "restricted option". Essentially, this is an option that acts very much like a traditional CFD.
-
There is also a proposed new "Other Products" rule (COBS 22.4.21). If it looks like a CFD, smells like a CFD and quacks like a CFD – then providers should consider related rules when offering such ducks.
The proposals in more detail
The consultation paper complains of poor firm conduct before ESMA's intervention. The FCA proposals include restricting the marketing and distribution of both CFDs and CFD-like options to retail clients. The scope of the FCA's proposal is wider than ESMA's intervention since it intends to include what the FCA calls "CFD-like options", being products with many of the same characteristics as CFDs, which they indicate is to stop firms getting around the measures by offering retail customers CFDs in slightly different legal forms. Accordingly, in terms of scope, the measures are intended to encompass CFDs, spread bets, rolling spot forex products and CFD-like options that are marketed, sold or distributed by firms in or from the UK to retail clients. Key elements of the proposals are:
(1) Leverage limits
-
major FX pairs and certain government bonds 30:1 - minimum margin 3.33%;
- major stock market indices, minor FX pairs and gold 20:1 - minimum margin 5%;
- minor indices and commodities (excluding gold) 10:1 – minimum margin 10%;
- single stock equities and all other assets 5:1 – minimum margin 20%;
- crypto currencies 2:1 – minimum margin 50%.
This is different from measures set out in CP16/40 (published in December 2016) which proposed different levels for inexperienced and experienced customers. One difference from ESMA's measures is in relation to certain government bonds where leverage would be permitted at 30/1 in comparison to ESMA's 5/1.
(2) Margin close out
The FCA also proposes to standardise market practice by requiring firms to close out a retail client's position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account.
(3) No loss guarantee
The FCA also proposes to require firms to guarantee that retail clients cannot lose more than their funds in their CFD trading account.
(4) No benefits
Next, the FCA proposed to ban monetary and non-monetary benefits (excluding information research tools) that incentivise retail clients to trade CFDs.
(5) Standardised risk waring and customer loss statistic
The FCA also proposes to require a standardised risk warning in which firms provide specific disclosures to retail clients outlining the key risks of trading CFDs and with disclosure of the percentage of loss making accounts over the previous 12 months. These will need to be updated on a quarterly basis under the proposals.
Other products
A further element of the consultation is a chapter discussing the nature of the wider UK retail derivatives market and the FCA's concerns in relation to, for example, futures and a request for evidence and views from market participants.
Separately, in their paper on binary options, the FCA are proposing to permanently prohibit the sale, marketing and distribution of all binary options to retail customers, applying measures under Article 42 of MiFIR. To the extent that their measures go beyond the MiFIR power, they will use their rule making powers under the Financial Services and Markets Act 2000.
The FCA indicate that binary options are often too complex for retail customers to calculate performance and fair value, they pose a risk of widespread mis-selling to less sophisticated retail clients, and there is information asymmetry inherent in the products' valuation. The FCA has also not chosen to exclude products that ESMA described as securitised binary options.
Feedback on both consultations is sought by 7th February 2019.
