The Financial Conduct Authority (FCA) has published two consultation papers today aimed at addressing the ‘harm’ to retail consumers from the sale of certain derivative products.
The new rules would prevent firms acting in or from the UK from selling binary options to retail customers as well as restricting the sale of certain contracts for difference (CFD) products.
Binary options are a tax-free but high-risk way to trade markets with just two possible outcomes: either the trade is successful and generates a significant return, or it’s unsuccessful and the full investment amount is lost.
BINARY OPTIONS BAN
The European Securities and Market Authority (ESMA) temporarily banned the sale of binary options to retail customers this summer. Only professional clients with experience of working in financial markets and a portfolio of €500,000 or more are now allowed to trade binary options.
In this respect the FCA’s proposals are the substantially the same as the ESMA rules although they go further with the inclusion of so-called ‘turbo’ certificates. Also the rules will be permanent rather than temporary.
CFDs have been in the regulators’ sights for several years due to the rapid increase in the number of retail customer using them to trade stocks. In ESMA’s view, CFDs are ‘inherently risky and complex products and are often traded speculatively’ causing retail clients to lose money.
In August it introduced rules limiting the amount of leverage or borrowing that retail clients were allowed to use, ranging from 2:1 for crypto-currencies through to 30:1 for major currency pairs such as Euro-Dollar.
PROTECTIONS IN PLACE
It also required companies to put in place protections to guarantee that customers couldn’t lose more than the total amount in their CFD account and demanded that the industry issue standardised risk warnings telling customers up front the percentage of retail accounts which make losses.
Again the FCA’s proposed rules are no different to ESMA’s rules and CMC Markets (CMCX), which provides online retail trading, has issued a statement today to say that they will have no material impact on its business.
The FCA estimates that a permanent ban on binary options could save retail customers up to £17m in annual losses while retail client losses on CFDs could be somewhere between £250m and £450m annually.
The fact that its proposals don't go any further than the ESMA rules, which companies have had to live with since the summer, has been well received by the market.
Shares in CMC Markets are trading up 1% to 107p while IG Group (IGG) shares are up 2% to 566p and Plus500 (PLUS) shares improve 3% to £14.40.
