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Retail CFD firms face potential EU market-wide restrictions and further criticism from the FCA

03 July 2017. Published by Lucy Kerr, Senior Associate

The European Securities and Markets Authority (ESMA) has announced it is considering imposing restrictions on contracts for difference (CFD) trading that would mean seismic changes for the industry, whilst the FCA has announced its serious concerns about the CFD industry's continued failure to meet expectations regarding the treatment of retail clients.

At the end of June, ESMA announced that it will consider using its intervention powers under Article 40 MiFIR to address investor protection risks in the CFD sector. These powers allow ESMA to impose leverage limits, guaranteed limits on client loss, and/or restrictions on the marketing and distribution of CFDs for retail investors. However, any restrictions require prior approval by the ESMA Board of Supervisors and could only be implemented after 3 January 2018 (when MiFIR comes into effect).

Following this announcement, the FCA has confirmed that it will hold off on implementing changes to conduct rules for CFD firms, which it had originally proposed in December 2016 (CP16/40).  However, the FCA clarified that if ESMA's decision is delayed, the FCA intends to implement its own conduct rules for UK CFD firms in the first half of 2018.

In addition, the FCA also announced the results of its review into the appropriateness assessments conducted by CFD firms when on-boarding retail clients, which followed its Dear CEO letter of February 2016.  The FCA identified five key areas of concern:

  • inadequate assessments of prospective clients' knowledge of CFDs;

  • insufficient consideration of prospective clients' previous transactional experience;

  • inadequate risk warnings to prospective clients who fail appropriateness assessments;

  • failure to evaluate whether failed applicants should be allowed to make CFD transactions in any event; and

  • poor oversight, weak controls and inadequate management information in CFD firms.

    These concerns echo the FCA's 2016 Dear CEO letter, demonstrating the lack of improvement that the FCA has found in the industry's treatment of retail clients. As a result, the FCA is encouraging firms to assess their policies and procedures, and to pay particular regard to MiFID II (which also takes effect on 3 January 2018).

Therefore, despite the delay to the FCA's plans to impose changes to the conduct rules for CFD firms in the UK, the industry continues to face increasing scrutiny and criticism.  Further, with the introduction of MiFID II, ESMA's potential imposition of restrictions on CFD trading and prospective new FCA conduct rules, the regulatory future of the CFD industry has never been more uncertain.

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