UK regulators fight back
The authorities in the United Kingdom are cracking down on the high-risk Contracts for Differences (CFD) sector, which entails trading financial derivatives where the difference of the opening and closing prices will be cash settled.
The financial watchdog in the region, the Financial Conduct Authority (FCA), had a temporary crackdown in place on the CFD sector. This is now being made permanent through significant restrictions on the marketing and selling of CFDs to retail investors, which can quickly build up massive losses.
The measure comes almost a year after ESMA, the European regulator, brought in stricter rules on the sector to stop ordinary investors from being able to use much leverage when using these products. As a result, the popular trading platforms can now only have max levels of leverage of about 30:1, and these limits drop even further to 2:1 when it comes to assets that are more volatile. This restriction has resulted in revenues and profit levels dropping significantly since the rules came into effect in August 2018.
Protective measures for UK customers
In the UK, a customer’s position will now be automatically closed out when their funds drop to 50% of the margin they need to keep their positions open on their account. Protections will be in place to stop customers from losing more money than what it is in their account. Additionally, there will be no more monetary or non-monetary incentives to encourage people to trade.
The FCA is also putting restrictions on the options space to stop trading firms from getting around the new CFD crackdown. Any intermediary that markets, distributes, or sells options that are similar to CFDs to UK-based customers will have to abide by FCA rules.
FCA comments
Speaking about the need for stricter rules on the sale of CFDs and other similar options, the FCA’s executive director for strategy and competition, Christopher Woodward, said they have “evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them.”
He added:
“We saw firms offering CFDs with increasingly higher leverage, resulting in high proportions of consumers losing money. EU rules are temporary. The new rules maintain and strengthen protections for consumers.”
The new FCA rules will come into effect in the UK on August 1, 2019 for the CFDs, while the rules covering options that mimic CFDs will be put into force on September 1.
What are CFDs?
CFDs are similar to spread betting in sports: the greater the difference between the opening and closing price, the greater your profit or loss will be. This means you can quickly make a lot of money using CFDs, but you can also quickly mount up significant losses. In view of its high risk, this trading strategy has been illegal in the United States for some time.
There are countless CFD trading platforms online that allow investors to start trading with relatively small sums of cash. The sector is not really regulated, and a lot of the platforms out there today are somewhat dubious. Every day, fraudsters con people in the UK out of an average £87,000 using fake CFD platforms.