Product intervention On 8 May 2017, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), issued a public order (Allgemeinverfügung) prohibiting the further marketing, distribution and sale of contracts for differences (CFDs) to German retail clients insofar as these clients may become subject to calls for additional margin. https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Pressemitteilung/2017/pm_1705 08_cfd_en.html Background First “use case” of newly introduced BaFin powers This order follows a public consultation in December 2016/January 2017. It is the first instance of BaFin making use of their new product intervention powers. These product intervention powers were introduced into German law in July 2016 through the Retail Investors Protection Act (Kleinanlegerschutzgesetz) and anticipate the product intervention powers included in the Markets in Financial Instruments Regulation (MiFIR) which will apply from 3 January 2018. The application of their product intervention powers are part of a broader initiative by which BaFin intends to increase the level of consumer protection in the financial services sector. As part of this initiative, BaFin has also set up a separate unit dealing exclusively with all types of consumer protection aspects. European developments Across Europe regulators have lately been reviewing certain retail investment products and in some cases the marketing and/or the distribution of specific products has been prohibited by national competent authorities (NCAs). In June 2016, the European Securities and Markets Authority (ESMA) issued a warning regarding the sale of CFDs, binary options and other speculative products to retail investors. https://www.esma.europa.eu/press-news/esma-news/esma-issues-warning-sale-speculativeproducts-retail-investors In addition, ESMA issued an opinion regarding the scope of the product intervention powers under MiFIR in January 2017. https://www.esma.europa.eu/press-news/esma-news/esma-calls-consistent-application-mifirproduct-intervention-powers Under MiFIR not only NCAs, but also ESMA and the European Banking Authority (EBA) will have product intervention powers. It is to be expected that under the MiFIR regime, product interventions will no longer be limited to certain European countries, but rather be issued by ESMA and/or EBA on a European level. Product intervention Background Date of application Impact Further developments “By restricting trading in CFDs we are making use for the first time of the product intervention option” Elisabeth Roegele BaFin Executive Director BaFin: Prohibition on the marketing, distribution and sale of leveraged CFDs to German retail clients 2 German developments on credit-linked notes In 2016, BaFin had also considered to prohibit the marketing, distribution and sale of creditlinked notes (CLNs) to German retail clients. As a response to the proposed prohibition, the German Banking Industry Committee (Deutsche Kreditwirtschaft) and the German Derivatives Association (Deutsche Derivate-Verband) committed themselves to rebrand CLNs. On this basis, BaFin suspended its ban but announced that they would examine whether the package of measures proposed by the industry is effective during June/July 2017. https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Pressemitteilung/2016/pm_1612 16_bonitaetsanleihen_branche.html With regard to CFDs, the industry concerned proposed certain commitments, e.g. an extensive application of so-called educational tools, but BaFin did not accept any of the proposed commitments. Date of application The prohibition of leveraged retail CFDs shall be implemented no later than by 10 August 2017. It will become binding and enforceable unless affected firms have filed an administrative appeal with the BaFin by 9 June 2017 and obtained an injunction of the administrative court reinstating the suspensive effect of their appeal. Impact The marketing, distribution and sale of CFDs to German retail clients will be prohibited insofar as these clients may become subject to calls for additional margin. Any violation of this order constitutes an administrative offense pursuant to Sec. 39 (2) No. 2b of the German Securities Trading Act and can be sanctioned with significant fines. This prohibition will equally apply to German firms or German branches of foreign firms marketing, distributing or selling leveraged CFDs in Germany, as well as to foreign firms providing these services on a cross-border basis to retail clients in Germany. It remains to be seen whether sales to German residents whilst being outside Germany will also be affected. Positions opened before 10 August 2017 should not be affected. However, the BaFin has expressly rejected limiting the prohibition to new clients on-boarded after 8 May 2017. In addition to directly affecting firms offering CFDs for retail clients, this order could also indirectly affect firms marketing CFD products of CFD providers, hedging positions of CFD providers or providing other support services to CFD providers. However, it remains possible to sell CFDs to German retail clients if they have been upgraded to professional clients. Retail clients can opt into the regime for professional clients if they have the necessary experience, knowledge and expertise to make an investment decision in CFDs, and if they are capable of adequately assessing the risks involved. Further developments As set out above, BaFin will shortly examine whether the voluntary commitments regarding CLNs of the German Banking Industry Committee and the German Derivatives Association have the desired effects. Apart of this review of CLNs, it is to be expected that the marketing, distribution and sale of further complex investment products to retail clients will become subject to the regulator’s scrutiny. From 3 January 2018, ESMA and EBA will have the right to apply their product intervention powers pursuant to MiFIR across Europe.