UK: UK Conduct Authority Consults On Permanent Product Intervention Measures

On December 7, 2018, the U.K. FCA launched two consultations proposing to prohibit the sale, marketing and distribution of binary options to retail consumers and to restrict the sale, marketing and distribution of contracts for difference and similar products to retail customers. Both CFDs and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by providers and distributors of the products. The FCA's product intervention powers under the Markets in Financial Instrument Regulation and, where the FCA has gone beyond those powers, FSMA 2000, allow it to impose prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern. The proposed rules would be permanent and would replace the temporary measures introduced, and subsequently renewed, by ESMA earlier this year.

The proposed rules would apply to the following firms that carry out in-scope activities in the U.K. or provide services from the U.K. into another jurisdiction: (i) U.K. MiFID investment firms (except for collective portfolio management investment firms) and banks authorized under the CRD that carry out MiFID business; (ii) EEA MiFID investment firms (except for collective portfolio management investment firms) and CRD banks doing MiFID business using their passporting rights; and (iii) third-country investment firms with a branch in the U.K.

The Binary Option Ban

The U.K. ban on the sale, marketing and distribution of binary options to retail consumers will apply to all binary options. It will include so-called "securitized binary options," which ESMA defined as binary options listed on a formal trading venue, are subject to a prospectus and have minimum contract periods from the point of entry to the expiry of the binary option. ESMA excluded securitized binary options when it renewed the EU binary options ban from November 1, 2018 for a further three-month period. The FCA does not believe the characteristics of these types of binary options sufficiently address the investor protection concern. In addition, the FCA's view is that the ban should ensure that securitized binary options do not become widely offered in the U.K.

The CFD Restrictions

The FCA's proposals to impose restrictions on the sale, marketing and distribution of CFDs and directly substitutable products are based on ESMA's temporary restriction (currently due to expire on February 2, 2019) and feedback to the FCA's 2016 discussion paper on possible restrictions. The FCA is proposing to require firms to:

  1. limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset
  2. 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
  3. provide protections that guarantee that a client cannot lose more than the total funds in their trading account
  4. desist offering current and potential customers cash or other inducements to encourage retail customers to trade and
  5. provide standardized risk warnings that inform customers of the percentage of their retail client accounts that make losses.

The FCA's proposals differ from ESMA's measures in two ways. First, they set leverage limits for CFDs referencing certain government bonds to 30:1, compared to ESMA's 5:1 limit. Second, they apply to a wider range of products, covering both CFDs (spread bets, rolling spot FX products) and CFD-like options (such as turbo certificates, knock out options and delta one options).

The FCA is also seeking input on whether exchange-traded futures and OTC forwards should be brought within scope of the rules or also be subject to similar rules. The FCA is requesting information on the activities that firms currently undertake in these markets and whether other products might present similar risks. The FCA also discusses possible policy options, including leverage limits, margin close out rules and negative balance protections, transparency requirements and a commercial hedging exemption.

Responses to both consultations should be submitted by February 7, 2019, except for responses to the discussion on futures and forwards, which should be submitted by March 7, 2019. The FCA intends to publish responses to the consultation feedback and final rules in March 2019.

Firms subject to ESMA's measures should continue to comply with them for as long as they are in force in the U.K. The FCA states that in the event of a "hard Brexit" in which the U.K. will exit the EU on March 29, 2019, if its permanent rules are not in place, it will likely adopt temporary measures replicating ESMA's temporary measures to ensure that there is no loss of protection in any intervening period.

The FCA also confirmed that it will consult in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers.

The binary options ban consultation paper is available at:, the CFD restriction consultation paper is  available at:, the technical annex to the CFD  restriction consultation paper is available at:  and details of the FCA's 2016 discussion paper on CFD's are available at:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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