With the general administrative act of 8 May 2017 issued pursuant to section 4b (1) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) restricted the marketing, distribution and sale of financial contracts for difference (CFD) (a description can be found here). New CFD contracts with an additional payments obligation may no longer be offered to retail clients since the implementation period expired on 10 August 2017. Since then, BaFin has been reviewing CFD offers on the German market on an ongoing basis in order to assess their compliance with the aforementioned general administrative act. Now BaFin has now issued a guidance notice in this respect. The guidance is intended to highlight those points which BaFin considers important for implementation of the provisions of the general administrative act, especially:
- An additional payments obligation within the meaning of the aforementioned general administrative act describes an arrangement whereby, as a result of a CFD position being opened by the client with the provider, the client must pay a sum of money in excess of the funds available in their CFD account to the CFD provider. This also applies to payments requested by the provider before closing the position, for example within the context of margin calls.
- Use of the term “additional payments obligation” in the terms and conditions is not decisive. BaFin also considers the terms “deficit”, “shortfall”, “difference”, “negative balance” or any paraphrase to be indicative of an additional payments obligation if they lead to a situation where a retail investor is obliged to settle a negative balance on their CFD account.
- Contractual arrangements which, on the basis of the trading behaviour of the retail client, provide for a netting of the retail client’s claims against the CFD provider or other undertakings are not permitted if they go beyond the amount available in the client’s trading account and, in this sense, may constitute an additional payments obligation when looked at from an economic point of view.
- The contractual preclusion of the additional payments obligation must apply unconditionally and in every instance. It is not permitted to make the preclusion of the additional payments obligation dependent on conditions such as particular trading behaviour on the part of the retail clients (e.g. no preclusion in the event of “improper behaviour” by the client or in the event of the client having an “insufficient margin”), on the discretion of the CFD provider or on a particular market situation.
- Even if the CFD provider offers certain precautions in the trading algorithm, such as a guaranteed stop-loss order for instance, the possibility of an additional payments obligation for the client must be expressly ruled out in the contract.
BaFin will examine the provisions of the general administrative act on an ongoing basis with due consideration of the above guidelines and, if necessary, enforce the provisions through administrative enforcement measures. Pursuant to section 39 (2) no. 2b of the WpHG, an administrative offence is deemed to be committed by any party who, willfully or negligently, fails to comply with an enforceable order under section 4b (1) of the WpHG.
German articles on this topic can be found here, here and here.