On 1 July 2019, the FCA published Policy Statement 19/18: Restricting contract for difference products sold to retail clients (PS19/18).

In PS19/18 the FCA states that the new rules will require firms that offer contracts for difference (CFDs) and CFD-like options to retail consumers to:

  • limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset;
  • 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 trading account;
  • stop offering current and potential customers cash or other inducements to encourage retail consumers to trade; and
  • provide a standardised risk warning, telling potential customers the percentage of the firm’s retail client accounts that make losses.

The FCA has concluded that CFD-like options should be subject to the product intervention rules on the basis that firms cannot seek to avoid the CFD measures by offering closely substitutable products. The FCA thinks that CFD-like options pose the same risk of harm as CFDs and that their additional product features and existing rules do not sufficiently reduce their potential harm.

The FCA confirms that the product intervention rules remain applicable to restricted speculative investments, namely CFDs, spread bets, rolling spot forex contracts and restricted options.

The FCA confirms that the definition of CFD-like options has unchanged since its consultation. However, it has added the term ‘leveraged’ to the definition of CFDs, spread bets and rolling spot forex contracts. But the term ‘leveraged’ has not been added to the definition of CFD-like options because the FCA is not aware of any options that do not provide leveraged exposure to an asset.

The FCA adds that SCARPs (as defined in the Handbook) are not within the scope of the product intervention rules. Constant leveraged certificates, as described in the feedback to its consultation, are within scope of the rules.

If a firm carries out marketing or distribution or selling in, or from, the UK of CFDs or CFD-like options to retail clients, it will be required to comply with the product intervention rules from 1 August 2019 for CFDs and 1 September for CFD-like options.

The FCA warns that expects firms to comply with the rules. The FCA’s supervisory work in this area will focus on the following areas of the restrictions:

  • firms’ prudential soundness including their management of negative balance protection;
  • firms’ treatment of clients in the course of Brexit-related restructuring
  • if applicable, the conduct of inward passporting firms operating under the temporary permissions regime; and
  • attempts to avoid the new rules by, for example, inappropriately opting up clients to become elective professional clients.

The FCA states that, in relation to Brexit, if there is not an implementation period and the passporting regime falls away when the UK leaves the EU, EEA firms who currently passport into the UK and wish to continue operating in the UK will be subject to the temporary permissions regime or the financial services contracts regime (which covers supervised run-off firms and contractual run-off firms). Once the UK is no longer subject to EU law, the FCA expects the final rules to apply to firms with a temporary permission, supervised run-off firms and contractual run-off firms.

The FCA will continue to monitor for any harm to retail consumers relating to exchange-traded futures and similar OTC products.

The FCA states that it will shortly publish a Consultation Paper on a potential ban on the sale to retail clients of derivatives and certain transferable securities that reference cryptoassets, following its public commitment in the UK Cryptoasset Taskforce Final Report. Should the FCA decide to proceed with a ban following that consultation, such rules would replace its final measures restricting how CFDs referencing cryptocurrencies are sold to retail clients.