FCA Issues Warning About Alternative CFD Products

The ESMA’s new regulations on the selling of CFDs to retail clients have come into force, but already the FCA is warning about attempts to get around the rules.

The announcement of new regulations from the ESMA sent shockwaves through the sector. Ever since then, platforms which offer the affected products have been looking at ways to get around the rules, including a number of ‘alternative’ CFDs. However, as the rules come into force, the FCA has raised concerns.

The new rules are intended to make high leveraged CFD products such as spread bets safer and to reduce the risk to retail clients who might not fully understand the risks they were taking on. The FCA chose this moment to reiterate its support for the move and to warn against attempts to get around the regulations.

In a statement the UK regulator confirmed it would be keeping a close eye on firms selling high-risk and speculative instruments to retail investors. In particular, it was concerned that some firms would be trying to get around the regulations by turning to alternative, similarly complex and high leveraged instruments.

These alternative CFDs could potentially circumvent ESMA regulations forcing law makers to push for further regulations. Products such as Turbo Certificates allow investors to make leveraged returns to both the upside and the downside of the asset. They are complex, can be difficult for many retail investors to understand and carry plenty of risk.

In a statement, the FCA said: “ESMA’s intervention is focused on CFDs, but we remind firms of their existing obligations. In particular, if a firm is considering marketing, selling or distributing alternative products, it should pay attention to conduct of business requirements. These include rules on the client’s best interests, communications with clients and financial promotions, and suitability and appropriateness. We also expect firms to consider carefully whether they can satisfy their relevant product governance obligations.”

The FCA said it will be working closely with the European regulator to monitor and assess the sale of these alternative products and, if necessary, to develop further regulatory measures.

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Tom Cropper is a financial journalist with work which has appeared in titles such as the Guardian, Euromoney and many others.