CFDs And Retail Clients: Will The Central Bank Prohibit The Sale/ Distribution Of CFDs To Retail Clients, Or Introduce Stricter Investor Protection Measures?

Author:Mr Robert Cain and Maedhbh Clancy
Profession:Arthur Cox
 
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CENTRAL BANK CONSULTATION

On 6 March 2017, the Central Bank published a Consultation on the Protection of Retail Investors in relation to the Distribution of CFDs seeking feedback on whether it should prohibit the sale or distribution of contracts for difference (CFDs) to retail clients in and from Ireland, or put in place stronger investor protection measures to protect the interests of those retail clients.

WHAT ARE CFDS?

CFD are complex financial products that allow investors to speculate on the short-term movements in an underlying reference asset. For the purposes of the Central Bank's consultation, CFDs include contracts for difference, spread bets and rolling spot forex contracts.

These products are very highly leveraged and investors can be exposed to unlimited losses. The Central Bank has noted the aggressive marketing strategies used by some providers, and is concerned that firms employing such strategies are not acting honestly, fairly and professionally, and in their clients' best interests.

BACKGROUND

Central Bank View A Central Bank review of CFD offerings in 2011 found that warnings were inadequate and that compliance with consumer protection requirements was low.

In November 2015, the Central Bank wrote to all MiFID firms setting out the results of its themed inspection into the CFD market and execution-only sales, confirming its view that CFDs are not suitable for investors with low risk appetites in light of the volatile nature of the CFD market, and the fact that investors can lose more than they put in. Of the over 39,000 retail clients who invested in CFDs in 2013 and 2014, 75% made a loss, and the average loss was €6,900.

In its consultation paper, the Central Bank confirmed that between 2015 and 2016, 74% of retail clients that invested in CFDs lost money, with the average loss being €2,700.

ESMA Warnings ESMA also issued warnings on CFDs in 2013, 2014 and 2016.

In 2013, it cautioned that investors should only consider investing in CFDs if they had wide-ranging experience of trading in volatile markets, a full understanding of how CFDs operate, an awareness of the high level of risk involved in highly leveraged investments, an awareness that their positions can be closed without their agreement and an ability to devote sufficient time to actively managing their investments. In its 2014 investor warning, ESMA reiterated that CFDs are complex products that require a high level of knowledge to enable the inherent risks to...

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