The European Securities and Markets Authority (ESMA) is prohibiting the marketing, distribution, and sale, of binary options, and restricting the sale of contracts for difference (CFDs), to retail investors, the regulator announced on Tuesday.
The restrictions on CFDs include leverage limits. a margin close-out rule on a per account basis, a risk disclosure requirement and restrictions on the use of incentives by CFD providers.
Last year, the Canadian Securities Administrators (CSA) adopted their own ban on binary options for retail investors.
ESMA’s intervention stems from “significant investor protection” concerns with these products, it says in a news releases.
The European regulators concerns include: the complexity and lack of transparency of the products; product features including excessive leverage, structural expected negative returns, and embedded conflicts of interest between providers and their clients; the disparity between the expected return and the risk of loss; and issues related to their marketing and distribution.
Regulatory analysis on CFD trading across different EU jurisdictions shows that 74% to 89% of retail accounts typically lose money on their trades, ESMA says with average losses per client ranging from €1,600 to €29,000. The regulator also found consistent losses on retail clients’ accounts that trade binary options.
“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide a risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristic,” says Steven Maijoor, ESMA chairman, in a statement.
“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage — in the case of CFDs — has resulted in significant losses for retail investors,” he adds.
The new measures are in effect for three months, and ESMA will consider the need to extend them.
The U.K. Financial Conduct Authority (FCA) says it supports ESMA’s measures, and that it will consult on whether to apply these measures on a permanent basis.