On 26 April 2019, the Financial Conduct Authority (FCA) announced that it will delay the publication of a Policy Statement and any final FCA Handbook rules for contracts for difference (CFDs) and CFD-like options sold to retail clients. The FCA had previously indicated that publication of a Policy Statement and final rules would take place in April 2019, but its recent statement has announced that it now plans to publish these rules in “Summer 2019”.
In June 2018, European Securities and Markets Authority (ESMA) introduced a temporary EU-wide ban on the sale of binary options to retail investors and restrictions that limited how particular CFDs could be sold to retail investors due to the significant investor protection risks they pose. This represented ESMA’s first use of its temporary product intervention powers under Article 40 of the Markets in Financial Instruments Regulation 648/2012 (MiFIR). ESMA has extended its application of its temporary product intervention powers on a rolling three month basis to date.
Following ESMA’s temporary restrictions, the FCA published Consultation Paper 18/38 (CP 18/38), on 7 December 2018, which proposes measures to address poor conduct in the UK market by UK and EEA firms who offer CFDs to retail consumers, and to limit the sale of CFDs and CFD-like options with excessive risk features that result in harm to retail consumers.
CP 18/38 proposed to make ESMA’s measures permanent in the UK (ESMA may not make permanent product interventions) and sets out that FCA-authorised firms must continue to comply with ESMA’s temporary decision that restricts the marketing, distribution or sale of particular CFDs to retail clients. Any final FCA Handbook rules for CFDs would apply from the date that ESMA’s restrictions expire, if not before. The FCA announced that firms would be given at least two months to comply with any new FCA rules. If EU law ceases to apply in the UK before ESMA’s temporary decision expires, the Consultation Paper proposes that ESMA’s temporary measures will continue to apply as part of UK domestic law.
The FCA’s proposed intervention is wider in scope than ESMA’s temporary restriction (which includes only CFDs) by including both CFDs and CFD-like options. The most commonly traded CFD-like options are sold under labels such as ‘turbo certificates’, ‘knock out options’ and ‘delta one options’, all of which are products that have many of the same characteristics as CFDs. Additionally, the FCA’s intervention proposes to set leverage limits for CFDs referencing certain government bonds to 30:1 (in comparison to 5:1 under ESMA’s measure).
Investments caught within the scope of the proposal include CFDs, spread bets, rolling spot forex contracts and ‘restricted options’ (the last of which is a new glossary definition set out in the Paper to catch CFD-like options), but only where such investments qualify as ‘financial instruments’ under MiFID.
The proposal will directly impact: retail clients who invest in CFDs and CFD-like options; UK and EEA MiFID investment firms marketing, distributing or selling CFDs and CFD-like options in or from the UK to retail clients; and UK branches of third country investment firms marketing, distributing or selling CFDs and CFD-like options.
Whether the proposals in CP 18/38 will apply in the UK will depend on the FCA’s views following consultation. Given the large interest in the proposals, it is possible that the revised timeframe for final rules in “Summer 2019” may further be delayed.
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