Breaking: ESMA Implies Inspecting Brokers’ Pro Clients Practice

The ESMA is signaling vigilance over professional clients and third-country branches

The European Securities Markets Authority (ESMA) published an announcement confirming that the pan-European regulator is extending the validity of CFDs restrictions. The news comes as no surprise after the FCA made the temporary restriction permanent.

Only national regulators have the power to transform the measure into a permanent one. So far only the FCA and Bafin have been actively communicating with retail brokers about their intentions.

The new extension is valid for three months since February 1, 2019. The next extension is scheduled for the second half of April and should become effective from May 1, 2019.

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What is more interesting is in the rationale behind the decision. The ESMA is closely watching brokers as we found out after exclusively reporting on a dataset which the UK FCA demanded from brokers. Some companies are implied to have violated the restriction on suggesting to customers a reclassification to professional status.

Professional Clients & Offshore Subsidiaries

A screenshot of ESMA's document restricting marketing of CFDs
A section in ESMA’s restriction extension that highlights some details

National regulators reported to the ESMA an increase in the number of clients treated as professional clients. The figures were substantially higher when compared to a year ago.

“ESMA is aware that some CFD providers are advertising to retail clients the possibility of becoming professional clients on request,” the EU regulator’s decision states.

The watchdog elaborates that only a customer may request to be treated as a professional client. The ESMA highlights that it is aware that some brokers have been advertising “professional clients” solicitations.

According to the EU regulator, brokers should ensure that they comply at all times with all applicable legislative requirements.

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“ESMA is also aware that some third-country firms are actively approaching Union clients or that some CFD providers in the Union are marketing the possibility for retail clients to move their accounts to an intra-group third-country entity,” the document continues.

According to the regulations, third-country firms are allowed to offer services to EU clients explicitly on their own request. The ESMA appears to be signaling that it might have encountered irregularities on part of brokers.

Finally, the ESMA is aware that firms are starting to provide other speculative investment products. ESMA will continue to monitor the offer of these other products to determine whether any other Union measures are appropriate.

Client Costs Decline

Outside of balance losses, clients have paid significantly lower amounts to their brokers over the first three months of the ESMA CFDs limitation. As the regulator states in its decision, retail clients incurred “significantly lower” costs for trading CFDs.

“Average costs in respect of active retail accounts containing CFDs on cryptocurrencies fell disproportionately in comparison to others, though such accounts continued to incur higher costs than accounts with no cryptocurrency exposure,” the ESMA elaborates.

In addition, national regulators are reporting a sustained decrease in the number of automatic close-outs, as well as the number of times accounts, went into negative equity and the size of negative equity balances. 

Profitability Unchanged

The ESMA is providing a detailed explanation behind its rationale to extend the temporary measures once more. National regulators have reported that only minor violations of the new regime have been observed since its implementation in August 2018.

According to the discussions at a regulatory level, the number of retail clients, trading volumes and client equity declined significantly. Moreover, the regulators didn’t observe any changes to levels of profitability over the three month period until October 2018 when compared to the same three months in the previous year.

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