CNMV enhances retail investor protection in the CFD market

The increasing marketing to retail investors of certain complex and risky products, such as contract of differences (CFD), rolling spot foreign exchange contracts (FX products) or binary options, is a matter of particular concern to the Spanish Securities Market Commission (the Comision Nacional del Mercado de Valores or CNMV) as it is for the European Securities and Markets Authority (ESMA). The CNMV’s release (available only in Spanish) can be found here.

CFD, FX products and binary options as well as risks associated with them are difficult to comprehend for most retail investors. In fact, recent studies carried out by the CNMV in this area have concluded that a number of retail investors in this type of products have suffered losses.

For the time being, the CNMV has not imposed a ban on the sale of these products but has, instead, recently launched a battery of measures to enhance retail protection in Spain when investing in CFD, FX products or binary options. These protective measures, which are aimed at intermediaries who (other than in the context of investment advice context) market these speculative products (regarding Forex Products, when leverage is 10:1), include the requirement that the intermediary:

• Expressly warns retail clients that, due to their complexity and risk, the CNMV considers that the said products are not suitable for retail clients.
• Informs retail clients about costs derived from immediate disinvestment, and in the particular case of CFD and FX products, warns clients that losses may exceed the initial invested amount.
• Keeps evidence that the retail client is duly aware of the complexity of the product and that the CNMV considers them not suitable for retail clients. A handwritten text or voice recording from the client expressly acknowledging this is expressly required.
• Includes warnings in all advertising materials used by the entities to promote CFD, FX products or binary options in line with the above.

At the earliest opportunity (and in any case in one month’s time), entities must adapt their systems and internal procedures in order to make the above warnings available to retail investors and to request evidence of acknowledgement from them.

Apart from taking a proactive approach in ESMA so that coordinated measures to improve investor protection are taken at a European level, the CNMV plans to address other supervisory authorities to request that the same measures be taken by intermediaries marketing these speculative products on a cross border basis to Spanish clients.