In CP16/40 the FCA sets out a package of reforms aimed at firms that provide contracts for difference products to retail clients.

The Financial Conduct Authority (FCA) proposes measures to enhance conduct and investment protection in the market for retail contracts for differences (CFDs) that are offered through online trading platforms. In this context, CFDs are complex leveraged derivative financial instruments that provide indirect exposure to price movements in underlying stock, indices, commodities or currencies through trades with an investment firm on an over-the-counter basis.

The proposals include:

  • Enhanced disclosure – standardised risk warnings and mandatory profit-loss disclosures;
  • Leverage limits and minimum margin requirements – (i) lower limits for inexperienced retail clients with less than 12 months active trading experience in CFDs or comparable products; and (ii) higher limits for experienced retail clients, set to the volatility of the underlying asset;
  • Prohibition of bonus promotions – e.g. any type of account opening bonus or benefit; and
  • Restrictions on financial promotions from incoming EEA firms that do not adopt comparable measures.

These measures will involve system change: e.g. to indicate whether clients are experienced or inexperienced, to provide the differing levels of initial margin to leverage limit ratios for different underlying asset types, and to operate margin close out at the prescribed level (see the discussions in paragraphs 3.22 to 3.39, especially paragraphs 3.22 and 3.32 for more detail).

CP 16/40 also considers the sale and distribution of binary bets, which should soon fall within the FCA’s scope (as HM Treasury is expected to amend the Regulated Activities Order (SI 2001/544) for MiFID II implementation) rather than the Gambling Commission’s remit as is the case now. The FCA moots quite significant policy proposals:

  • Restricting the class of retail clients to whom these can be promoted;
  • Use of product intervention powers under MiFID II; and
  • Using product governance, so the products are designed for the needs of an identifiable target market, are transparent as to fair value and are appropriately distributed.

CP 16/40 is a response to the FCA’s belief that there has been an insidious extension of target clients as firms try to respond to competition in the market and conservatively estimates that around 80% of retail CFD customers have lost money. This CP closed on 7 March 2017.