FCA plans permanent CFD intervention measures

FCA is consulting on permanent rules to restrict the marketing, distribution and sale of CFDs and CFD-like options to retail consumers.  The proposals are similar to the ESMA temporary measures, but FCA wants also to cover closely substitutable products and are proposing some different leverage limits. FCA feels the action is necessary because of constant poor conduct by firms that have offered CFDs with increasingly higher leverage to retail consumers who do not fully understand the risks.

The proposals do not amount to a total ban, but will:

  • require firms to limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure the CFD provides;
  • mandate closing out a customer’s position if their funds fall to 50% of the margin needed to maintain their open positions;
  • guarantee a client cannot lose more than the total funds in their CFD account;
  • ban firms from offering inducements of any kind to encourage trading; and
  • provide a standard risk warning firms must use to tell potential customers what percentage of their retail accounts make losses.

FCA also seeks views on whether other complex derivatives products would benefit from similar rules.  Consultation closes on 7 February 2019 and FCA aims to publish final rules by March, coming into force 2 months later. FCA intends that the rules will apply to those firms within the relevant MiFID scope, and will legislate to make this so regardless of whether there is a hard or soft Brexit.