Monday, October 8, 2018

CFDs Regulations By The FCA

The FCA  held an event for CFD providers to set out their concerns and expectations of the sector. The topics discussed included prudential standards, suitability, and the Senior Managers Regime. Watch a video, where Robert Taylor, Head of Asset Management Global Strategy, and Gunnar Burkhart, a Senior Adviser, give an overview of our concerns and what we will be working on in the future.

Across the sample, the FCA found the majority of CFD providers and distributors had a poor target market definition. Many relied on broad investor descriptions such as ‘experienced’, ‘sophisticated’ and ‘financially literate’, without defining what these terms actually mean in practice. Most firms were also unable to adequately explain how the nature and risks of the CFD product was aligned to their target market.

Last Friday, the UK’s Financial Conduct Authority (FCA) issued a statement clarifying the authorization of cryptocurrency derivatives. In the statement (link), they explained that offering trading in cryptocurrencies such as bitcoin are not currently regulated by the FCA. However, requiring to be authorized are derivatives based on cryptocurrencies such as CFDs, options and futures.

The CFD market has attracted significant attention from regulators in recent years. This scrutiny is understandable. The FCA views CFDs as high risk, complex products where many investors have already lost money. The Dear CEO letter highlighted that, during the period under review, 76% of those who bought CFDs, as part of advisory or discretionary portfolio management services, during the period under review, lost money.

A major unknown of the Brexit process for financial institutions has been the issue of MiFID passporting. That, in the FCA’s view, seems to be a non-issue for now.

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The FCA is proposing to require leverage limits to be imposed by firms, depending on a client’s level of experience and the nature of the underlying assets. The FCA observes that, at present, some firms offer leverage as high as 600:1 (i.e. a client could put down £100 and take a position worth £60,000) and that the risk of loss can be exacerbated by the use of automatic close-outs by firms.

The CySEC has introduced  restrictions on bonus promotions and is also targeting the use of leverage, although its leverage restrictions are less severe than the FCA’s proposals. CySEC states that firms should offer retail clients a default leverage limit that does not exceed a cap of 50:1, but firms will still be able to give clients the option to change the default to a higher leverage.

Given what the FCA considers are “significant weaknesses” across the sample of firms assessed for the review, the FCA believes that there is a high risk that firms across the sector are not meeting its rules and expectations when providing and distributing CFDs. As a result, the FCA states that consumers may be at serious risk of harm from poor practices.

The UK’s Financial Conduct Authority has suspended the processing of market data due to a technical problem, less than two weeks after the submission of such data to national regulators became mandatory under the European Union’s new trading rules. “The MDP has been temporarily suspended due to an issue with processing files. We have asked firms to hold file submission temporarily. Normal operation will be resumed as soon as possible,” an FCA spokesperson told Ris.

The debate surrounding the regulation of cryptocurrencies is long ongoing, with players ranging from the UK Treasury to the G20 stepping in to have their say. Recently, The FCA  has released a statement in an attempt to clear up when cryptocurrencies and crypto-related assets fall under existing regulation and which firms need to be concerned.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. See our full Risk Warning and Terms of Business for further details. Apple, iPad, and iPhone are trademarks of Apple Inc., registered in the U.S. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

The FCA says: “Firms need to improve a number of oversight and control arrangements to reach standards we would consider adequate, given the relevant rules and guidance mentioned throughout this letter. We are concerned that if firms do not address these poor practices, there is a greater risk that consumers will experience poor outcomes through the provision and distribution of CFDs.”.

Smaller asset managers are, as predicted, at the sharp end of the changes. They report reduced access to research compared with their larger competitors and are among the biggest spenders on research aggregators such as RSRCHXchange itself. Things also look pretty bleak for coverage of smaller corporates. Around 82% of respondents to the survey believed that Mifid II will result in reduced coverage for small and mid-cap stocks.

“More detailed and comparable firm data are required to provide clarity on the impact of different factors on individual client outcomes. These data and analysis are intended to inform any future policy decisions, and provide a basis on which we can evaluate the impact of any prospective rules. The FCA will continue its focus on the sector through its on-going programme of supervisory work,” the UK regulator concludes.

In the UK, under Article 84 of the Regulated Activities Order, FX forward contracts that are taken out for commercial purposes are exempt from regulation. Industry practice has been to regard virtually any FX forward taken out by a trading enterprise as being, de facto, for a commercial purpose.

Reference
Breaking: FCA Delays New Forex and CFDs Regulations until 2018 .... (2018). Retrieved on October 8, 2018, from https://www.financemagnates.com/forex/brokers/breaking-fca-delays-new-forex-cfds-regulations-till-2018/.

Contracts for difference | FCA. (2018). Retrieved on October 8, 2018, from https://www.fca.org.uk/firms/contracts-for-difference.

FCA expects EU. (2018). Retrieved on October 8, 2018, from https://www.leaprate.com/forex/regulations/fca-expects-eu-mifid-license-passporting-continue-post-brexit/.

FCA gets tough on retail CFD sector | Banking Expert Insights .... (2018). Retrieved on October 8, 2018, from http://www.blplaw.com/expert-legal-insights/articles/fca-gets-tough-on-retail-cfd-sector2.

FCA has its say on cryptocurrency derivatives under MiFID II. (2018). Retrieved on October 8, 2018, from http://www.altfi.com/article/4260_fca-has-its-say-on-cryptocurrency-derivatives-under-mifid-ii.

FCA looks at stable door after Mifid has bolted | Euromoney. (2018). Retrieved on October 8, 2018, from https://www.euromoney.com/article/b190t475rt2zxy/fca-looks-at-stable-door-after-mifid-has-bolted.

FCA sounds more warnings over high. (2018). Retrieved on October 8, 2018, from https://www.moneymarketing.co.uk/fca-sounds-warnings-high-risk-cfd-sales/.

FCA system failure throws Mifid data into doubt. (2018). Retrieved on October 8, 2018, from https://www.risk.net/regulation/5384326/fca-system-failure-throws-mifid-data-into-doubt.

FCA to launch asset management Mifid probe | Financial Times. (2018). Retrieved on October 8, 2018, from https://www.ft.com/content/8d912582-6fda-11e8-852d-d8b934ff5ffa.

FCA uncovers weak practices among CFD providers, notes .... (2018). Retrieved on October 8, 2018, from https://financefeeds.com/fca-uncovers-weak-practices-among-cfd-providers-notes-importance-mifid-ii-compliance/.

FCA “Dear CEO” Letter to CFD Providers and Distributors Highlights .... (2018). Retrieved on October 8, 2018, from https://www.corporatefinancialweeklydigest.com/2018/01/articles/eu-developments/fca-dear-ceo-letter-to-cfd-providers-and-distributors-highlights-concerns-following-review-of-cfd-market/.

KWM | FCA proposes tougher rules for retail CFD, FX and spread .... (2018). Retrieved on October 8, 2018, from https://www.kwm.com/en/uk/knowledge/insights/tougher-rules-for-retail-cfd-providers-20161209.

Alison Donnelly. (2018). FX forwards: in or out of scope under MiFID II?. Retrieved on October 8, 2018, from http://blog.fscom.co.uk/fx-forwards-in-or-out-of-scope-under-mifid-ii.

Finextra. (2018). FCA's Dear CEO Letter comes with Product Governance Implications. Retrieved on October 8, 2018, from https://www.finextra.com/blogposting/15216/fcas-dear-ceo-letter-comes-with-product-governance-implications.

GKFX. (2018). MiFID II. Retrieved on October 8, 2018, from https://www.gkfx.com/Mifid.

Ron Finberg. (2018). FCA Seemingly exempts Cryptocurrency CFDs from MiFID II reporting. Retrieved on October 8, 2018, from https://blog.cappitech.com/blog/fca-seemingly-exempts-cryptocurrency-cfds-mifid-ii-reporting.

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