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FCA Publishes Consultation Paper on Restricting CFD Products Sold to Retail Clients and on Product Intervention Measures for Retail Binary Options

FCA Publishes Consultation Paper on Restricting CFD Products Sold to Retail Clients

On December 7, the UK Financial Conduct Authority (FCA) published a consultation paper on restricting contract for difference (CFD) and other derivative products sold to retail consumers.

In its consultation paper, the FCA is proposing to intervene in the CFD market to address allegedly poor conduct by firms offering CFD products to retail customers, and to limit the sale of CFDs and similar products with excessive risk features that could result in harm to such customers. The FCA has proposed rules that will require firms to:

  1. limit leverage depending on the volatility of the underlying asset;

  2. close out a customer’s position when their funds fall to 50 percent of the margin needed to maintain open positions on their CFD account;

  3. provide protections that guarantee a client cannot lose more than the total funds in their CFD account;

  4. stop offering monetary and non-monetary inducements to current and potential customers encouraging them to trade; and

  5. provide a standardized risk warning, informing potential customers of the percentage of their retail client accounts that make losses.

The FCA also is asking for feedback on whether exchange-traded futures and related over-the-counter derivative products present similar risks of harm to retail customers and may therefore need similar rules. Additionally, the consultation paper includes the draft Conduct of Business (Contracts for Difference) Instrument 2019, which will make changes to the Conduct of Business sourcebook of the FCA’s Handbook.

The consultation paper closes to comments for CFD proposals on February 7, 2019, and for other retail derivative products on March 7, 2019, after which the FCA will aim to publish its policy statement by March 2019. If the FCA decides to extend the scope of its rules for other retail derivative products, it will consult on this later in 2019.

The FCA will consult separately early next year on banning the sale, marketing and distribution of derivatives that references cryptoassets to customers treated as retail clients.

The FCA’s consultation paper is available here.

FCA Publishes Consultation Paper on Product Intervention Measures for Retail Binary Options

On December 7, the UK Financial Conduct Authority (FCA) published a consultation paper on product intervention measures for retail binary options.

The FCA is proposing to prohibit the sale, marketing and distribution of binary options in or from the UK to retail consumers by creating new rules in its Conduct of Business sourcebook (COBS).

The FCA has expressed significant concerns regarding investor protection from the sale of binary options to UK retail consumers. The FCA has justified these concerns based on evidence of aggressive and/or misleading marketing of these products, their inherent complexity and lack of transparency, and the level (and speed) of retail consumer losses experienced when trading binary options.

The consultation closes to comments on February 7, 2019. The FCA will aim to publish a policy statement by March 2019. In the meantime, the FCA reminds firms that they need to continue to comply with similar intervention measures made by the European Securities and Markets Authority (ESMA), for as long as ESMA’s decision notice in relation to such measures is in force in the UK.

The FCA’s consultation paper is available here.

©2019 Katten Muchin Rosenman LLP

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John Ahern, Financial Attorney, London, Katten Law Firm
Partner

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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