UK Regulator Publishes Rules Restricting Sale of Contracts for Difference and Related Options

The U.K. Financial Conduct Authority has published the Conduct of Business (Contracts for Difference) Instrument 2019, implementing product intervention measures designed to restrict the sale, marketing and distribution of contracts for difference and contract for difference-like options to retail consumers. The rules will affect: (i) retail clients who invest, or may invest, in CFDs and CFD-like options; (ii) investment firms caught by the provisions of the Markets in Financial Instruments Directive (including those caught by the Capital Requirements Directive, where appropriate) that are involved in marketing, distributing or selling CFDs and CFD-like options in, or from, the U.K. to retail clients; and (iii) U.K. branches of third-country investment firms that are involved in marketing, distributing or selling CFDs or CFD-like options to retail clients.

The rules have been introduced in response to the European Securities and Markets Authority's temporary product intervention measures.  The ESMA measures were introduced initially for three months in 2018 and were designed to address ESMA's finding of EU-wide conduct issues in this market. The FCA consulted on implementation of a permanent version of the rules in 2018; the final rules were originally intended for publication in April this year, but were postponed while the FCA considered feedback on its proposals. Earlier this year, the FCA imposed a ban on binary options through similar product intervention measures.

The new U.K. product intervention measures introduce the following requirements on firms offering CFDs or CFD-like options:
 

• Firms must require retail clients to provide margin to open a position in CFD or CFD-like options in ratios of between 30:1 and 2:1, depending on the nature of the underlying asset;
• Firms must close out a retail client's account when the value of the margin in their account falls to below 50% of the margin required to open the account;
• Retail clients will only be liable for losses on relevant CFD or CFD-like option investments up to the value of the funds in their accounts;
• Firms must not offer incentives (whether monetary or otherwise) to retail clients to purchase CFDs or CFD-like options; and
• Firms must incorporate a standardized risk warning to be incorporated on relevant products, warning clients of the risks of investing in such products and informing them of the percentage of the firm's retail client accounts that make losses.

The FCA has published a Policy Statement alongside the new rules that sets out the results of its consultation.

The rules apply in respect of CFDs entered into from August 1, 2019, and in respect of CFD-like options from September 1, 2019. The FCA has flagged the areas its supervision is likely to focus on, which include firms' prudential soundness, treatment of clients during Brexit-related restructuring and attempts to avoid the effect of the new rules.

View the Conduct of Business (Contracts for Difference) Instrument 2019.

View the FCA's Policy Statement.

View details of the FCA's ban on binary options.

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