The Spanish Securities Market Commission (CNMV) expects its additional two-part restrictions on the marketing, distribution and sales of contracts for difference (CFDs) instruments, to come into effect on July 20, 2023. The European Securities and Markets Authority (EMSA) disclosed this today (Tuesday) in its public opinion on the extra measures which it said are “justified and proportionate.”

Spanish Regulator Goes Harder against CFDs

The first part of the new restrictions, which expands rules introduced by CNMV in 2019 and ESMA in 2018, bans marketing communications or practices aimed at retail clients or the general public. This includes the use of sales agents, call centres or software providers to recruit investors.

The rules prohibit the sponsorship of events and organizations and the use of public figures to market CFDs. However, the restriction exempts sponsorship and brand advertisements made by brokers that do not offer CFDs or for whom the instruments only make up a ‘small part’ of their offerings or general activities.

In addition, the new measures exclude certain CFDs information: those provided on the sole request of a client, those necessary to perform transactions related to CFDs and those related to ‘objective data on CFDs’ such as fact sheets that do not include ‘subjective elements’.

On the other hand, part two of the additional restrictions cover the marketing, sale and distribution to retail clients of other certain ‘leveraged products’ such as certain types of futures and options. For instance, the Spanish regulator will require providers of these other ‘high-risk products’ to close one or more of a retail client’s open positions when the value of the positions is reduced to half of the initial margin.

Furthermore, the scope of this second part comes with an exclusion: turbo products whose total amount of risk is equal to the amount invested are exempted. Turbo products, which are similar to CFDs, are leveraged derivatives that allow investors to profit from the movement of an underlying asset.

75% of Spanish Retail Investors Lose CFDs Trades

CNMV’s upcoming extra restrictions follow the Spanish regulator’s public consultation on the additional rules made in November last year. The watchdog said restrictions it introduced in 2019 “had limited effectiveness in terms of investor protection.”

It explained that the extra rules became necessary as approximately 75% of retail investors still suffer losses on their investments in CFDs despite previous restrictions. This is even as a ‘large part of the distribution of CFDs’ in Spain are carried out by entities with passports from other European Union member states.

When explaining the trends that necessitated the additional restrictions, CNMV in its public consultation document pointed out that CFDs remain accessible to Spanish retail clients who lack sufficient financial knowledge of the instruments.

The regulator blamed the trend on brokers adopting ‘aggressive generalist advertising campaigns’ which sometimes pass through third parties without due authorization to provide investment services. It added that retail investors are even lured through mass call centres and other methods that evade existing restrictions.

Meanwhile, Finance Magnates reported that CNMV in 2017 mandated every forex, CFDs and binary options provider offering leverage higher than 1:10 to issue additional risk warnings to their retail clients. When a client wants to trade in leveraged products, they are to issue a disclaimer that warns them that losses from such trading may exceed the amount that is required to open the position.

CFDs Regulation in the UK

Elsewhere in Europe, other regulators are closely watching the CFDs industry. The UK Financial Conduct Authority (FCA) recently found 'gaps in surveillance' among CFDs providers in the country. Specifically, the British watchdog discovered weak monitoring of market manipulation and abuse of non-equity asset classes among the brokers.

Earlier this month, the FCA disclosed that only 61% of UK CFDs brokers will fully comply with its Consumer Duty requirements for products and services open for sale and renewal by the time the July 31, 2023, deadline elapses. The Duty sets higher and more precise standards of consumer protection across the financial services industry in the UK.