Legal Shorts 05.07.19 including restricting contract for difference products sold to retail clients

Restricting contract for difference products sold to retail clients

On 1 July 2019, the FCA published its finalised rules restricting how CFDs and CFD-like options are sold, marketed, and distributed to retail consumers, typically through online trading platforms.

The FCA has intervened in this market to address poor conduct by UK and EEA firms who offer CFDs to retail consumers, and to limit the sale of CFDs and similar products with excessive risk features that result in harm to retail consumers. The new rules require firms that offer CFDs and CFD-like options to retail consumers to:

  • limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset;
  • close out a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account;
  • provide protections that guarantee a client cannot lose more than the total funds in their trading account;
  • stop offering current and potential customers cash or other inducements to encourage retail consumers to trade; and
  • provide a standardised risk warning, telling potential customers the percentage of the firm’s retail client accounts that make losses.

The rules will directly effect: retail clients or potential retail clients who invest in CFDs and CFD-like options; MiFID investment firms, including Capital Requirements Directive (CRD) credit institutions as appropriate, who are marketing, distributing or selling CFDs and CFD-like options in, or from, the UK to retail clients; and UK branches of third-country investment firms who are marketing, distributing or selling CFDs and CFD-like options to retail clients.

Firms carrying out sales, marketing or distribution in, or from, the UK of the relevant products to retail clients, need to comply with the new rules in our Handbook from 1 August 2019 for CFDs and 1 September 2019 for CFD-like options.

European Commission adopts Delegated Regulation amending PRIIPs Delegated Regulation to align transitional arrangements

On 3 July 2019, the European Commission published the Delegated Regulation (C(2019) 4912 final) it has adopted that amends the PRIIPs Delegated Regulation ((EU) 2017/653) to align the transitional arrangement for PRIIP manufacturers offering units of funds referred to in Article 32 of the PRIIPs Regulation ((EU) 1286/2014) as underlying investment options with the prolonged exemption period under that Article.

The Delegated Regulation amends the transitional arrangements for certain firms and persons by two years, to 31 December 2021. It does not alter the substance of the PRIIPs Delegated Regulation or create new obligations for manufacturers of PRIIPs, or persons advising on or selling PRIIPs, and is consistent with the extended transitional arrangement in the PRIIPs Regulation.

The next step is for the Delegated Regulation to be considered by the European Parliament and Council of the EU. It states that it will enter into force 20 days after its publication in the Official Journal of the EU (OJ).

FCA consults on prohibiting sale to retail clients of investment products referencing cryptoassets

On 3 July 2019, the FCA published a consultation paper (CP19/22) on prohibiting the sale, marketing and distribution to retail clients of derivatives and exchange traded notes (ETNs) referencing certain types of cryptoassets by firms acting in, or from, the UK.

The FCA considers these products are ill-suited to retail clients who cannot reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets. The following features mean retail clients might suffer harm from sudden and unexpected losses if they invest in such products:

  • The inherent nature of the underlying assets, which have no reliable basis for valuation.
  • Prevalence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in the cryptoasset secondary market.
  • The extreme volatility in cryptoasset prices movements.
  • Inadequate understanding by retail clients of cryptoassets and the lack of a clear investment need for investment products referencing them.

The FCA is not proposing to extend a ban to professional or eligible counterparty clients, derivatives or ETNs that reference other tokens, or collective investment undertakings.

The proposed rules are in the draft Conduct of Business (Cryptoasset Products) Instrument 2019, which is in the appendix to CP19/22 and proposes amendments to the Handbook Glossary and the Conduct of Business sourcebook (COBS).

Complaints Commissioner suggests FCA follows up on complaint relating to investment in unregulated products

On 2 July 2019, the Office of the Complaints Commissioner published a final report (FCA00550) (dated 14 June 2019) regarding a complaint about the FCA’s supervision of a financial adviser at an FCA-authorised firm. In 2014, the complainant sought advice on options for investment and retirement planning. The adviser recommended the complainant use his pension lump sum to take out two loan agreements with a company, described as low risk and in his best interests. The company declared insolvency and the complainant lost his entire investment of £125,000.

The complainant subsequently learned the adviser had a connection to the company; a conflict of interest that was not disclosed. Financial Ombudsman Service (FOS) redress was not available against the adviser, only the firm for which they worked, which had gone into voluntary liquidation. The Financial Services Compensation Scheme (FSCS) declined the complainant’s claim as the loans were unregulated and the company was unregistered, although he was not aware at the time.

The Commissioner did not uphold the complaint (part of which was outside his scope) as he was satisfied the FCA had conducted an appropriate investigation and provided a reasonable response. However, he:

  • Recommended the FCA takes urgent steps to ensure it has proper arrangements in place for liaison with the FSCS. The FCA has advised it has taken action and is confident it now has proper arrangements in place.
  • Suggested the FCA seeks a response from the FSCS regarding why the complainant’s loss was not covered when it appears customers of the firm with other unregulated products were compensated and such products have been covered following the collapse of another firm.
  • Suggested the FCA explains to the complainant why he did not receive a client contact letter in October 2017, advising customers of the firm to contact the FSCS, and why this letter was sent if unregulated products were not covered.

The Commissioner has previously raised with the FCA his concern that people may be under the false impression that their investment is protected because the firm is regulated by the FCA. He welcomes FCA initiatives in this regard, but considers it “clearly needs to do further work” to reassure consumers and the public they can have more confidence it is fulfilling its consumer protection mission. 

The FCA has published a response, noting the Commissioner’s suggestions and advising it is making enquiries and will respond shortly.

FCA speech on regulating cryptoassets

On 2 July 2019, the FCA published a speech, given by Christopher Woolard, FCA Executive Director of Strategy and Competition, on regulating financial innovation.

In his speech, Mr Woolard talks about Facebook’s plan to launch the “stablecoin” Libra in conjunction with a number of payment and tech firms. The FCA has been discussing these plans with Facebook, along with other regulators and central banks. If the plans come to fruition, Libra could be very significant, posing questions for the FCA and the Bank of England (BoE), and for their work with international partners. Its size and scale will pose questions for society and government about what is acceptable and desirable in this space.

In the UK, the FCA has tried to manage some of the tensions arising from the cryptoassets sector through a number of channels, including its regulatory sandbox. To date, this has worked well. However, the FCA is now facing issues that could have a fundamental effect on the financial services system. It needs to ensure that innovation works in consumers’ interests. To do this, the FCA needs to thoroughly understand the business models firms are suggesting, and how they benefit consumers. It also needs to consider the wider impact on market integrity and stability. Mr Woolard explains how the FCA seeks to critically analyse different cryptoassets, and illustrates the kind of challenges it is facing up to as a regulator. Labels such as stablecoin are not very helpful. Market participants use this as a broad term, encompassing a variety of different types of cryptoassets. However, the FCA considers that stablecoins could fall within or between any of the three regulatory categories of cryptoasset that it has identified. The FCA also questions whether tokens governed by algorithms or underpinned by other cryptoassets are necessary “stable”. Mr Woolard explains that this issue is not specific to stablecoins. The FCA tends to avoid the term “cryptocurrency” as they generally do not meet the core economic criteria of money. It prefers “cryptoasset” as it is more neutral and captures the broader range of tokens that are not just designed to act as a means of exchange. The FCA accepts that this is not an easy landscape to navigate. It invites firms to consider applying to its innovation firm support services, such as direct support or the regulatory sandbox.