Contracts for difference are a form of derivative trading, which enable investors to speculate on the rising or falling prices of fast-moving indices, commodities, shares and treasuries.
The UK watchdog proposed limiting the sale of these products, along with binary options, in December 2018.
On 1 July, the FCA confirmed it is putting in place permanent restrictions.
They apply from 1 August 2019 for CFDs and 1 September 2019 for CFD-like options.
To prevent firms from circumventing the changes, the regulator has also included CFD-like options.
The rules follow on from temporary restrictions applied by the European Securities and Markets Authority (Esma).
What are the changes?
Firms will be required to:
- Limit leverage to between 30:1 and 2:1.
- 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.
Exceptions to the rules
In response to feedback, the FCA has made two clarifications to its initial proposals.
It has excluded firms that sell CFD-like options in other jurisdictions, where the product is sold through an intermediary outside the UK.
Additionally, the sale and distribution activities of European Economic Area (EEA) firms outside the UK have been carved out of the restrictions. However, these firms are still prohibited from actively marketing unrestricted CFD-like options to UK retail consumers.
If intermediaries sell, market or distribute CFD-like options in, or from, the UK, they will be subject to FCA rules, meaning UK consumers will be protected.
Christopher Woolard, executive director of strategy & competition at the FCA, said: “Our intervention follows evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them.
“We saw firms offering CFDs with increasingly higher leverage, resulting in high proportions of consumers losing money. EU rules are temporary. The new rules maintain and strengthen protections for consumers.”