The Central Bank of Ireland (CBI), which also serves as a financial services supervisor, has published a consultation paper considering the prohibition of the sale or distribution of CFDs to retail clients in and from Ireland and the implementation of enhanced investor protection measures.
Other options considered are the prohibition of marketing of such products to retail investors and/or the limiting of leverage offered to retail investors to 1:25, regardless of the margin deposited by the client. The CBI is also mulling the mandatory introduction of negative balance protection (a guaranteed stop loss) to all retail clients on a per-position basis and the prohibiting of offering any form of trading incentives or account opening bonuses to retail clients in respect of CFD accounts.
Another considered measure is the introduction of more clear and meaningful information about the high risk of loss associated with trading in leveraged CFDs, including detailed profit-loss ratio of retail CFD clients over the previous calendar quarter and also over the previous 12-month period.
From the wording of the document it becomes clear that in essence the regulator is considering either a blanket ban on offering of CFDs to retail clients or the introduction of the aforementioned measures.
“CFDs are complex products which are widely advertised to the retail mass market in an online setting. It is timely for the Central Bank to take further and decisive action in relation to CFDs given the evidence that the probability of loss for consumers is very high. This work builds on previous work in this area and proposes stronger protections for consumers,” said Director of Asset Management Supervision, Michael Hodson.
The CBI is accepting answers to the questions regarding the two options, opinions on the listed measures and further proposals for other steps for enhanced risk protection. The deadline is May 29, 2017.
The Central Bank is considering introducing the proposed measures on a statutory basis. From 3 January 2018, this will include the product intervention powers under MiFIR.
Whatever path the CBI chooses, it will not be the sole regulator that has stepped up the measures against the rampant offering of financial products with high risk to unsuspecting and inexperienced retail investors who often lose significant sums. A CBI study, for example, found that 75% of retail clients who invested in CFDs in 2013-2014 made a loss. The average sum was €6900.
So far several several regulators have either introduced measures or are planning to do so. France‘s AIF has banned the advertising of forex, CFDs and binary options, while Belgium has altogether banned trading in those products. Cyprus has banned the trading bonuses and has introduced a 1:50 cap on the initial leverage offered to clients. Germany‘s BaFin has introduced a mandatory negative balance protection, while UK‘s FCA is considering the setting of a 1:50 leverage cap and banning bonuses to retail clients. The Netherlands is considering setting a cap of 1:10 and prohibiting the advertising, while Turkey‘s regulator has already imposed the 1:10 leverage cap and set a significant minimum deposit requirement.