Spanish Regulator Strengthens Measures on CFDs
The Spanish Securities Market Commission (CNMV) is set to introduce additional measures aimed at tightening the marketing, distribution, and sales of contracts for difference (CFDs) instruments. These new restrictions, consisting of two parts, are scheduled to take effect on July 20, 2023. The European Securities and Markets Authority (EMSA) has deemed these measures “justified and proportionate.”
The first part of the enhanced regulations builds upon rules previously established by CNMV in 2019 and ESMA in 2018. It encompasses a ban on marketing communications and practices targeting retail clients and the general public. This includes the use of sales agents, call centers, or software providers to attract investors.
Under these rules, marketing CFDs through the sponsorship of events and organizations, as well as the utilization of public figures, will be prohibited. However, the restrictions do not apply to sponsorship and brand advertisements by brokers whose primary offerings or activities do not involve CFDs, or for whom these instruments constitute only a small part.
Certain types of CFDs information will be exempted from these new measures. These include information provided solely upon client request, information necessary for CFD transactions, and “objective data” on CFDs, such as fact sheets that do not contain subjective elements.
The second part of the additional restrictions focuses on the marketing, sale, and distribution of other “leveraged products” to retail clients, including specific types of futures and options. For instance, providers of these high-risk products will be required to close one or more of a retail client’s open positions if their value decreases to half of the initial margin.
However, the second part contains an exclusion for turbo products, which are leveraged derivatives similar to CFDs. Turbo products will be exempt if their total risk is equal to the amount invested.
High Losses for Spanish Retail Investors in CFDs
The upcoming regulations from CNMV are a response to the regulator’s public consultation held in November of the previous year. CNMV found that the restrictions implemented in 2019 had limited effectiveness in protecting investors, as approximately 75% of Spanish retail investors continue to incur losses on CFD investments. It should be noted that a significant portion of CFD distribution in Spain is carried out by entities with passports from other European Union member states.
CNMV identified various factors that necessitated these additional restrictions during the public consultation. They highlighted that CFDs remain accessible to Spanish retail clients who lack sufficient financial knowledge of these instruments. The regulator attributed this issue to brokers employing aggressive advertising campaigns, often bypassing authorization to provide investment services through third parties. Retail investors are also enticed through mass call centers and other methods that circumvent existing restrictions.
Regulatory Oversight of CFDs in the UK
In a separate development, the UK Financial Conduct Authority (FCA) has been closely monitoring the CFDs industry. The FCA recently uncovered shortcomings in the surveillance practices of CFD providers in the country, particularly concerning the monitoring of market manipulation and abuse of non-equity asset classes.
Furthermore, the FCA disclosed that only 61% of UK CFD brokers are expected to fully comply with the Consumer Duty requirements by the deadline of July 31, 2023. The Consumer Duty aims to establish higher standards of consumer protection across the UK’s financial services industry.
