FCA proposes permanent measures for retail CFDs and binary options

07 December 2018

The Financial Conduct Authority (FCA) is proposing rules to address harm to retail consumers from the sale of certain complex derivative products with the publication of two consultation papers.

The rules would apply to firms acting in or from the UK and:

• ban the sale, marketing and distribution of binary options to retail consumers
• restrict the sale, marketing and distribution of contracts for difference (CFDs) and similar products to retail customers

The FCA is acting to tackle widespread concerns about the inherent risks of these products, and the poor conduct of the firms selling them, that has led to harm to consumers in the UK and internationally through large and unexpected trading losses.

The FCA’s 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
• 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
• 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
• provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses

The FCA estimates that the proposals for CFDs 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.

The binary options Consultation Paper is open until 7 February 2019. The CFD Consultation Paper is open until 7 February 2019 for feedback on the proposed measures and 7 March 2019 for feedback on the discussion of other complex derivative products.

Full news

CP18/38: Restricting contract for difference products sold to retail clients and a discuss of other retail derivative products

CP18/37: Product intervention measures for retail binary options

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