Irish central bank to crack down on retail FX and CFD offerings - Finance Magnates

The Central Bank of Ireland is taking a leaf out of the UK FCA book

The Irish central bank is going to be taking a close look at retail FX and CFD brokers offer to clients. They have initiated a consultation paper on "The protection of retail investors in relation to the distribution of CFD's".

They want to consider two main points;

1. The prohibition of the sale or distribution of CFDs to retail clients in and from Ireland; or

2. The implementation of enhanced investor protection measures including a limitation on
   leverage and a requirement that retail clients may not lose more than the amount(s)
   deposited on a per-position basis.

"A follow-up thematic inspection of CFD providers was carried out by the Central Bank in 2015.
This inspection found that 75% of retail CFD clients who invested in CFDs during 2013 and
2014 made a loss, of which the average loss was €6,900. It was observed that retail clients
generally were not sufficiently aware of the high risk and complex nature of the product. The
Central Bank concluded that CFDs are not suitable for investors who have a low risk appetite
due to the volatile nature of the CFD market, coupled with the potential for the consumer to
lose more than the initial investment.

A recent follow-up review by the Central Bank of a sample of the largest CFD providers in
Ireland found that in the two-year period up to 31 December 2016, 74% of retail clients lost 2
money with an average loss of €2,700. Studies of client data conducted in other European
jurisdictions have found similarly high levels of client losses."

Reading briefly through the paper, one of their biggest gripes is leverage, which is something readily offered by retail brokers but is very dangerous for most traders who don't know how to use it properly.

The CBoI want to reduce leverage and also implement negative balance protection. Their points below are pretty much inline with what the UK's FCA want to do;

• Leverage Limit - in order to prevent excessive risk taking arising from the availability of
  high levels of leverage, it is proposed that a maximum leverage limit of 25:1 (4% initial
  margin) will be set for retail clients trading all financial CFDs;

• Negative Balance Protection - in order to mitigate the possibility of clients losing more
  than they have deposited into their CFD trading accounts and noting that such losses are
  potentially limitless, it is proposed that firms will be required to provide negative balance
  protection (a guaranteed stop loss) to all retail clients on a per-position basis;

• Bonuses and other Promotions - in order to restrict their widespread misuse, it is
  proposed that firms will be prohibited from offering any form of trading incentives or
  account opening bonuses to retail clients in respect of CFD accounts; and

• Risk Disclosure - in order to make the risk warnings in relation to CFDs more meaningful,
  it is proposed that all firms offering CFDs to retail clients will be required to prominently
  display a standardised risk warning with details of the profit-loss ratio of retail CFD clients
  over the previous calendar quarter and also over the previous 12-month period.

During the consultation process they would like to hear responses to the following five questions;

1. Which of the options outlined in this paper do you consider will most effectively and
   proportionately address the investor protection risks associated with the sale or
   distribution of CFDs to retail clients? Please give reasons for your answer.

2. In relation to Option 2:
   a) Do you agree with the proposal to restrict leverage to 25:1 for retail clients trading
   CFDs? Please give reasons for your answer.
   b) Do you agree with the proposal that retail clients trading CFDs should not be at risk
   of potentially limitless losses and that firms offering CFDs should be required to put
   in place negative balance protection on a per position basis? Please give reasons for
   your answer.
   c) Do you agree with the proposal to prohibit all bonus promotions and trading
   incentives in relation to CFD client accounts? Please give reasons for your answer.
   d) Do you agree with the proposal to require firms offering CFDs to retail consumers
   to provide a standardised risk warning to clients disclosing the percentage of active
   retail CFD clients who suffered a loss of equity during the previous quarter and over
   the previous 12-month period? Please give reasons for your answer.

3. Are there further measures which the Central Bank should consider as part of its
   analysis? Please give reasons for your answer.

4. In relation to the options outlined in this paper, are there any detrimental effects on
   investors or the markets or unintended consequences that you consider should be taken
   into account by the Central Bank? Please give reasons for your answer.

5. What do you consider will be the likely effect of the options outlined in this paper on
   investors and market participants who may hold, use or benefit from CFDs? Please give
   reasons for your answer.

It looks like retail trading is firmly in the sights of global regulators.

Finance Magnates has more on the story here.