[Newsflash n. 9]

 

On 25 July, in the context of its supervisory and control activity on the retail market and following its Opinion on MiFID practices for firms selling complex products, ESMA issued a new warning regarding contracts for difference (CFDs), binary options and other speculative products (the “Products”) with the aim to address increasing investor protection concerns.
The Authority intends to drive the attention of the public on the risks involved in the investment in speculative and complex products, particularly in the current market scenario whereby there is a proliferation of aggressive advertisement and selling practices targeting retail investors, often carried out via on-line platforms. In such instance, the investment in these types of products could turn into significant detriment for the investors, who might underestimate or fail to understand the real risks involved.Following up on the previous warning released in 2013, ESMA warns the public about the major risks involved when investing in speculative products:
  • Potential failure to fully understand the risky, complex and speculative nature of the Products;
  • Potential selling of the Products by firms failing to comply with MiFID obligations;
  • Potential offer of the Products by unauthorised and unregulated entities;
  • Absence of an individual investment advice and of any suitability test (especially in case of online trading);
  • Aggressive marketing practices (e.g. enhanced emphasis on the possible gains and insufficient explanation of potential losses);
  • Possible conflict of interests caused by the firms’ business model (e.g. if the remuneration of the staff is linked solely to the numbers of new clients or if the profit of the firm is directly linked to the loss of the investor).
On the same topic, and with the goal of promoting a common supervisory approach in relation to the sale of speculative products to retail investors, ESMA also published an updated Q&A on the provision of Products to retail investors under MiFID, addressing the following issues:
  • Disclosure and information obligations of firms when selling such products to clients and potential clients;
  • Elements to be taken into account by National Competent Authorities (“NCAs”) while monitoring the firms’ behaviour;
  • Marketing nature of certain educational material and activities (training, seminars…) and subsequent application of relevant regulatory requirements;
  • Increased focus on the information to be obtained from investors in order to conduct an efficient appropriateness test (especially during the on-boarding process);
  • Methods to be used by NCAs while assessing whether the appropriateness assessment is being performed correctly by firms;
  • Factors that NCAs should evaluate when considering commercial arrangements between two authorised firms that results in the offer of CFDs or other speculative products to retail clients.
The above-mentioned ESMA’s documents can be found at the following links:
  • Warning about CFDs, binary options and other speculative products: https://goo.gl/cIBTUD
  • Questions and Answers relating to the provision of CFDs and other speculative products to retail investors under MiFID: https://goo.gl/0OMv68
Please do not hesitate to contact should you need any clarification on the warning or on the Q&A. 

Contacts:

Vito Vittore
Senior Partner

Elena Pagnoni
Of counsel

Luigi Bonifacio
Associate