CP18/38: Restricting contract for difference products sold to retail clients and a discussion of other retail derivative products

Open consultation: CP18/38
07/12/2018
Consultation closes
07/02/2019
Discussion closes
07/03/2019
Policy Statement and final Handbook rules
March 2019
March 2019

In this paper, we propose permanent rules to restrict how CFDs and CFD-like options are marketed, distributed, and sold to retail consumers. This paper also includes a discussion on whether other complex derivative products may pose similar risks of harm when sold to retail consumers and could benefit from similar measures.

Read CP18/38 (PDF)

CP18/38 Technical Annex (PDF)

Contracts for difference (CFDs) are complex, leveraged derivatives. They are typically offered to retail consumers through online trading platforms.

We are proposing to intervene in this market to address poor conduct by UK and EEA firms who offer CFDs to retail consumers, and to limit the sale of CFDs and similar products with excessive risk features that result in harm to retail consumers.

This Consultation Paper (CP) follows the European Securities and Markets Authority’s (ESMA) temporary EU-wide restrictions on the sale of these products to retail consumers. It also follows the FCA’s proposed rules in December 2016 (CP16/40), which we did not pursue at the time due to prospective action by ESMA.

We are proposing permanent rules to require firms to:

  • limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides
  • close out a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account
  • provide protections that guarantee a client cannot lose more than the total funds in their CFD account
  • stop offering monetary and non-monetary inducements to encourage trading, and
  • provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses

These measures are largely the same as ESMA’s temporary measures. However, we are also proposing to extend our rules to closely substitutable products, including so-called turbo certificates. We are also proposing 30:1 leverage limits for CFDs referencing certain government bonds (compared to 5:1 under ESMA’s measures).

We estimate that these proposals could reduce annual losses for retail customers of UK firms by between £267.4m to £450.7m per year.

This CP also discusses and seeks feedback in Chapter 4 on whether other complex derivative products, such as futures or similar over-the-counter (OTC) products, may pose similar risks of harm to retail consumers and could benefit from similar rules.

Who this applies to

Our proposals will directly affect:

  • retail clients or potential retail clients who invest in CFDs and CFD-like options
  • firms marketing, distributing or selling CFDs and CFD-like options in or from the UK to retail clients
  • UK branches of third country investment firms marketing, distributing or selling CFDs and CFD-like options

This CP is also relevant to:

  • consumer bodies
  • current and prospective retail clients who invest in options and futures
  • firms distributing or selling options and futures in, or from, the UK to retail clients

The CP also outlines the potential implications of the UK’s exit from the European Union. 

What you need to do

Please send us your comments on our proposed rules in the CP by 7 February 2019.

Please send us your feedback on our discussion in Chapter 4 of other retail derivative products by 7 March 2019.

Online response form

You can also:

  • email your responses to [email protected] or
  • write to: Wholesale Conduct Policy, Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN

Next steps

We will consider feedback on our proposals and aim to publish a Policy Statement and final Handbook rules by March 2019.

If finalised, rules for CFDs would apply shortly afterwards and those for CFD-like options would come in to force two months later.

If we consider extending the scope of our rules to products addressed in Chapter 4, we will consult on this later in 2019.

We will consult separately in early 2019 on a potential ban on the sale, marketing and distribution of derivatives that reference cryptocurrencies to retail consumers.