RegulationJun 1 2018

Ban on high-risk investment bets to take effect

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Ban on high-risk investment bets to take effect

Rules prohibiting the distribution, sale and marketing of certain high-risk speculative financial products to retail investors across Europe will come into effect in a month's time.

The European Securities & Markets Authority has confirmed the ban on binary options will come into effect on Monday 2 July.

A month after that - on Wednesday 1 August - restrictions on marketing, selling and distributing contracts for difference (CFDs) to retail investors will come into effect across the European Union.

It follows widespread concern among regulators, including the Financial Conduct Authority, that retail investors risked losing money by investing in these instruments.

Steven Maijoor, chairman of Esma, said: "The measures Esma has taken today are a significant step towards greater investor protection in the EU. 

"The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors. 

"Esma’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.

"This pan-EU approach is the most appropriate way to address this major investor protection issue. [National regulators] will monitor the impact of these measures during their application and will assess, with Esma, what next steps are required."

Binary options allow an investor to make a bet on the price of value of a stock, commodity, currency, index or anything capable of being measured in financial terms.

CFDs are a contract between an investor and an investment bank or spread-betting firm where, at the end of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including shares or commodities.

Analysis across the European Union found that between 74 and 89 per cent of retail accounts trading in CFDs typically lose money, with average losses per client ranging between €1,600 (£1,409) to €29,000 (£25,535).

Meanwhile Esma found investors in binary options made "consistent losses".

Esma's action on binary options represents a total ban on their sale, distribution and marketing but the regulator's action on CFDs includes a range of different restrictions rather than an outright ban.

As part of these restrictions, CFD providers will be banned from using incentives, a standardised risk warning will have to be issued which includes the percentage of losses on a provider's accounts, investors will have to be provided with guaranteed limits on their losses and the percentage of margin at which providers have to close out one or more retail clients' open CFDs will be standardised.