This notice sets out the FCA's reasons for acting contrary to the European Securities and Markets Authority’s (ESMA) Opinion of our national product intervention measures restricting how CFDs and CFD-like options are sold to retail consumers. This is required by article 43(3) of the Markets in Financial Instruments Regulation[1].
On 1 July 2019, the Financial Conduct Authority (FCA) published Policy Statement (PS)19/18[2] and finalised rules that restrict the sale, marketing and distribution of contract for differences (CFDs) and CFD-like options to retail clients in or from the UK.
On 2 July 2019, ESMA published an Opinion[3] concluding that overall our proposed national measures are justified and proportionate, with the exception for our decision to:
- Not apply our sales and distribution restrictions to CFD-like option providers authorised in other EEA Member States other than a UK branch or tied agent.
- Setting leverage limits for CFDs referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures).
Our reasons for proceeding with these proposals, contrary to ESMA’s Opinion are provided below, as required by Article 43(3) of the Markets in Financial Instruments Regulation (MiFIR 600/2014/EU).
Limiting the scope of our restrictions on CFD-like options
We have applied our rules to CFD-like options. We think that these products pose the same risk of harm because they have a similar pay-out structure to CFDs, and share common product features (i.e. they allow retail consumers to gain exposure to a wide range of assets for a fraction of the value of an asset). By capturing CFD-like options, our rules ensure that UK firms do not seek to avoid our CFD measures by offering closely substitutable products (where we have intelligence that UK firms may do this if our final rules covered only CFDs).
Under our final rules, UK retail clients will be able to continue to open accounts to trade unrestricted CFD-like options with product providers established in other EEA Member States (other than through a UK branch or tied agent), provided that these providers have not actively marketed the products in the UK. We did not think it would be proportionate, practical or effective to seek to apply our rules to overseas firms not supervised by the FCA and subject to different rules in their own jurisdiction.
Therefore, where a UK-based client contacts an overseas firm on their own initiative, that firm may still sell those products, if they are permitted in their own jurisdiction. CFD-like options are not commonly traded by UK retail consumers, nor are they commonly sold by UK firms.
We are not allowing EEA firms outside the UK to sell CFDs to retail clients in the UK, if a UK retail client approached that firm at their own initiative because there is a greater risk of harm. That is because they are more commonly sold on a cross-border basis and used by UK retail consumers to speculate on financial markets.
We consider that our rules will reduce actual and potential harm to UK retail consumers. We will continue to monitor the market and will review whether it is appropriate to limit the scope of our rules, and will amend our rules if there is evidence of increased detriment to UK retail consumers. We therefore consider that limiting our scope in this manner is justified and proportionate.
30:1 Leverage limits for CFDs and CFD like options referencing certain government bonds
Under our rules, UK firms must limit leverage for CFDs and CFD-like options referencing certain government bonds to 30:1 (compared to 5:1 under ESMA’s measures).
In reaching this view, we took account of firm feedback indicating that 5:1 leverage limits are disproportionate given that the main government bonds are less volatile than more major FX pairs. They also indicated that retail clients who use these products are more likely to use them hedging purposes when compared to CFDs with different underlying assets.
To ensure our leverage limits are appropriate and proportionate, we utilised the methodology used by ESMA in setting its leverage limits. Using historical price data, we concluded that a 30:1 leverage limit was consistent with leverage limits set for other asset classes, considering the historic volatility of certain government bonds.
We have also considered whether our proposed leverage limits could result in regulatory arbitrage and have a significant effect on the markets of other Member States or result in harm to retail consumers located in other EEA jurisdictions. As indicated in PS19/18, UK firms will however, need to limit leverage to 5:1 for CFDs referencing certain government bonds when selling CFDs to retail clients located in other EEA jurisdictions that have adopted the same rules as ESMA.
As noted by ESMA, 30:1 does not exceed the highest leverage limit for other asset classes in ESMA’s measures. We agree that this mitigates competition amongst providers that are subject to a stricter leverage limit.
As retail consumers are afforded protections by the rules of other National Competent Authorities (NCAs), we concluded that our rules will not impact the markets of other Member States or result in harm to their consumers.
Having considered this feedback, we concluded that 30:1 leverage limits provide are justified and proportionate for CFDs referencing certain governments bonds.