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:

  1. ban the sale, marketing and distribution of binary options to retail consumers
  2. 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.

Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:

‘We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products. This is despite focused supervisory work over several years to try and improve firms’ conduct. Today’s 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 FCA’s CFD consultation also seeks feedback on whether other complex derivative products, such as futures or similar over-the-counter (OTC) products, may pose similar risks of harm to retail consumers and could benefit from similar rules, or if this would have unintended effects.

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.

The FCA 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.

Source: FCA

Background

  1. CP18/38: Restricting contract for difference products sold to retail clients and a discuss of other retail derivative products
  2. CP18/37: Product intervention measures for retail binary options
  3. References to CFDs include financial spread bets and rolling spot forex products.
  4. ‘Closely substitutable products’ for CFDs include options that have similar pay-out structure and risk features as CFDs, which are sold under a variety of commercial labels, including turbo certificates, knock outs or delta ones. The proposed binary option ban would also include certain ‘securitised’ binary options. In both cases, these products were either carved out or not included in ESMA’s temporary intervention measures
  5. See ESMA’s temporary intervention Decision Notices for CFDs and Binary options.
  6. The FCA previously consulted on proposed domestic measures for CFDs sold to retail clients in CP16/40 published on 6 December 2016.
  7. The joint HM Treasury, Financial Conduct Authority and Bank of England Cryptoassets Taskforce report was published on 29 October 2018