FCA Hints at Widening Leverage Restrictions to Include CFD-Like Products

The regulator warns that firms may try to skirt around the regulations by offering similar investment products.

The leverage restrictions on contracts for differences (CFDs) in the European Union (EU) has come into effect today. However, Britain’s Financial Conduct Authority (FCA) has already voiced concerns that further reforms are needed on products that are similar to CFDs but are not currently included in the regulation.

In a statement today, the British watchdog has warned that banks may try to skirt around the regulations by still offering high leverage investment products to retail investors that have similar features to CFDs, such as Turbo Certificates. This is because the products are equally as complex and carry a high level of risk.

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As a result, the FCA has suggested that financial firms, such as banks and brokers, might have to further reform their offerings to retail customers. This is because the regulator believes that these alternative investment products create the same type of risks for investors as CFDs. 

The UK watchdog added that a recent Q&A from the European Securities and Markets Authority (ESMA) echoed these concerns. It highlighted that these alternative investment products could be sold under a variety of names, but they would be still very similar to CFDs. These similarities could result in significant losses for retail investors.

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According to the statement, the British regulator said: “we are concerned that firms may consider getting around ESMA’s measures by selling other similarly complex products to retail clients.”

ESMA and the FCA will monitor the situation

In the Q&A from ESMA, it also identifies that for products that have these similar features to CFDs, firms: “should pay particular attention to the leverage made available to retail clients and consider whether the product is offered on terms that act in the best interests of the client.”

Due to the concerns, the FCA will work with ESMA and other regulators in Europe to assess the situation. In particular, regulators will be focused on how the alternative and speculative products are sold to retail traders.

The watchdog warns that if it finds any evidence to suggest that the products are causing significant losses for investors, it will work with ESMA and support and further action needed. This could include the implementation of further regulation.

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