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U.K's FCA Proposes Permanent Measures For Retail CFDs And Binary Options

The U.K's Financial Conduct Authority or FCA said that it is proposing rules to address harm to retail consumers from the sale of certain complex derivative products with the publication of two consultation papers.

The rules would apply to firms acting in or from the UK and ban the sale, marketing and distribution of binary options to retail consumers; restrict the sale, marketing and distribution of contracts for difference or CFDs and similar products to retail customers.

Separately, IG Group Holdings plc (IGG.L) said that The FCA's proposals have been anticipated by the Company, and do not change the Company's expectations on performance or Group revenue.

IG said it continues to be supportive of the objective of regulators to improve client outcomes in this industry and will continue to engage fully with regulators. In IG's experience, when proportionate regulation has been applied consistently and appropriately, client outcomes have improved, and compliant providers have benefitted over the longer term.

The FCA said that it is is acting to tackle widespread concerns about the inherent risks of these products, and the poor conduct of the firms selling them, that has led to harm to consumers in the UK and internationally through large and unexpected trading losses.

The FCA noted that its proposed interventions are the same in substance as the European Securities and Markets Authority's (ESMA) existing, EU-wide temporary restrictions on these products, although the FCA is also proposing to apply its rules to closely substitutable products (including so-called turbo certificates). If confirmed the FCA's rule changes would have permanent effect.

For CFDs sold to retail clients, the FCA is proposing to require firms to: limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides; 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 CFD account; stop offering monetary and non-monetary inducements to encourage trading; provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.

The FCA estimates that the proposals for CFDs could reduce annual losses for retail consumers of UK firms by between 267.4 million pounds to 450.7 million pounds. A permanent ban on binary options could save retail consumers up to 17 million pounds per year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products.

The FCA said the binary options Consultation Paper is open until 7 February 2019. The CFD Consultation Paper is open until 7 February 2019 for feedback on the proposed measures and 7 March 2019 for feedback on the discussion of other complex derivative products.

The FCA noted that it will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers. This follows the commitment made in the UK Cryptoasset Taskforce Final Report published in October 2018.

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