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FCA delays intervention on contracts for difference pending EU action

The introduction of new rules restricting the sale of leveraged trading products to retail investors has been put on hold pending the outcome of an EU review, the Financial Conduct Authority (FCA) has announced.30 Jun 2017

Measures under consideration by the European Securities and Markets Authority (ESMA) are "broadly similar" to those proposed by the FCA in a consultation paper last year, the regulator said in a statement on its website. ESMA has also proposed some additional measures, including guaranteed limits on client losses.

Any EU-level restrictions on the products would not be introduced until January 2018 at the earliest, as this is when ESMA's product intervention powers under the recast Markets in Financial Infrastructures Directive (MiFID II) come into force. The FCA will "reconsider" whether to introduce UK-specific rules in the first half of next year in the event of a "significant delay" to ESMA's plans, it said.

"The FCA will continue to engage with ESMA to support the development of measures that promote a consistent level of investor protection across the European Union," it said.

Separately, the FCA said that it continued to have "serious concerns" about the sale of contracts for difference (CFDs) to retail customers.

"In particular, we are concerned that these complex, speculative products are reaching a wider target market than is likely appropriate," the regulator said in a statement.

"As such, the quality of firms' policies and procedures in relation to client on-boarding and assessment of appropriateness will remain a key focus for us. Our work in this area will continue, and we will consider enforcement investigations or other action as appropriate," it said.

The FCA's findings were based on a review of 23 firms offering these products to retail customers.

CFDs are complex financial instruments offered by investment firms, often through online platforms. They include so-called 'spread bets' and rolling spot foreign exchange products. CFDs effectively enable investors to bet on the extent to which the value of an underlying asset, such as equity shares or foreign exchange rates, will rise or fall.

The FCA and other national regulators have raised concerns that the easy availability of CFDs through online trading platforms has led to an increase in unsophisticated investors opening and trading products that they do not understand. Specifically, the FCA has raised concerns about whether trading firms are sufficiently assessing prospective customers' knowledge of the products and previous experience, and whether the risk warnings provided to customers are sufficiently strong.

Proposals put forward by the FCA for consultation last year included new risk warnings and disclosure requirements, and banning the use of 'bonuses' to encourage customers to open new accounts. It also proposed limiting the amount that traders could 'bet' on behalf of their retail customers to 50 times the individual's deposit, or to 25 times the individual's deposit if that person had been actively trading CFDs for less than a year.

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