It is hardly a surprise that the Financial Conduct Authority (FCA) intends to cap leverage to 1:25 for inexperienced traders and prevent forex brokers from offering any form of trading bonuses or benefits to promote risky CFD products. This measures are in line with ESMA’s guideline, published earlier in October, and other EU regulators, such as the Cyprus Securities and Exchange Commission (CySEC) have already taken the appropriate steps in this direction.
In a press release issued on Tuesday, FCA proposed stricter rules for forex brokers offering contract for difference products (CFDs), such as spread bets and rolling spot foreign exchange products to retail clients. By doing this, the regulator aims at improving the standards across the sector and ensure consumers are appropriately protected.
Lately, FCA registers an increase in the number of forex brokerage firms, as well as in the number of retail clients of such companies. FCA has concerns that most of the people who engage in trading CFDs do not adequately understand the nature of these products and the risks associated with it. According to the FCA’s analysis of a representative sample of CFD trading accounts, 82% of clients lost money on these products.
That is why, the UK financial watchdog proposed capping leverage at a maximum level of 50:1 and setting even lower leverage limits of 25:1 for inexperienced retail clients (with less than 12 months of experience in CFD trading). Currently some UK-based brokers offer leverage levels exceeding 500:1, which involve great risk of lossess in excess of initial investments.
CySEC has already announced it plans to set the default leverage to 1:50 previous week, taking into account ESMA’s recommendations. The same maximum leverage levels are allowed in the US.
The package of FCA’s measures intended to enhance consumer protection also include preventing brokers from using any form of trading or account opening bonuses or benefits to promote CFD products. According to the European Securities and Markets Authority (ESMA), brokers use trading bonuses to lure retail traders into trading in CFDs or other speculative products with high risk. It is also true that in many cases brokers require their clients to trade certain volumes in order to be able to withdraw the bonuses, which involves additional risks.
The FCA is also setting out its vision on a range of policy measures for binary options trading that would complement existing conduct of business rules, once these products are brought into the its regulatory scope.
FCA’ proposed regulatory amendments come on the background of an increased supervisory activity concerning risky instruments in Europe. Many EU regulators have expressed intentions to restrict high-risk trading in over-the-counter (OTC) products and especially binary options. Belgium banned the distribution via online channels of OTC binary options, spot forex, and CFDs with leverage from 18 August. France and the Netherlands are in the process of developing laws that would prohibit the advertisement of risky financial instruments, and Germany is also considering similar steps.