FCA sets out reasons for acting contrary to ESMA Opinion on its final rules for CFDS and CFD-like options
On 1 July 2019, the Financial Conduct Authority (FCA) published Policy Statement PS19/18 (PS19/18) which confirmed rules restricting the sale, marketing and distribution of contracts for difference (CFDs) and CFD-like options sold to retail consumers.
In response to PS19/18, on 2 July 2019, the European Securities and Markets Authority (ESMA) published an Opinion concluding that the FCA’s proposed national measures are “justified and proportionate’ except for:
- the FCA’s proposal not to apply the national restrictions to CFD-like option providers authorised in other Member States other than through a UK branch or tied agent in respect of the sale or distribution of those products to UK retail clients; and
- the FCA’s proposal to apply a 30:1 leverage limit for CFDs referencing certain government bonds, instead of the 5:1 leverage limit in ESMA’s measures.
As required under Article 43(3) of the Markets in Financial Instruments Regulation 600/2014/EU (MiFIR), on 2 July 2019, the FCA published a notice setting out its reasons for proceeding with its proposals contrary to ESMA’s Opinion.
In summary, the FCA has justified limiting the scope of restrictions on CFD-like options due to the fact that it “did not think it would be proportionate, practical or effective to seek to apply our [FCA] rules to overseas firms not supervised by the FCA and subject to different rules in their own jurisdiction“. The FCA noted that 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. However, EEA firms outside of the UK are not allowed to sell CFDs to retail clients in the UK due to a greater risk of harm to consumers where CFDs are more commonly sold on a cross-border basis and used by UK retail consumers to speculate on financial markets.
Additionally, the FCA concluded that the 30:1 leverage limit provided was justified and proportionate for CFDs referencing certain government bonds due to the fact that feedback indicated that 5:1 leverage limits (as proposed by ESMA) were disproportionate given that the main government bonds are less volatile than more major FX pairs. The FCA also explained that, having utilised the methodology used by ESMA in setting its leverage limits, it used historic data to conclude that a 30:1 leverage limit was consistent with leverage limits set for other asset classes, considering the historic volatility of certain government bonds.
The FCA stated that it will continue to monitor the market and will review whether it necessary to amend its rules if there is evidence of increased detriment to UK retail consumers.