MiFIR Tag

by Andria Papageorgiou

Opinion on the product intervention measures on CFDs and other high-risk products proposed by the Spanish CNMV

This article is about the Opinion of the European Securities and Markets Authority (“ESMA”) on the adoption of additional product intervention measures on Financial Contracts for Difference (“CFDs”) and other high-risk products by the Spanish Comisión Nacional del Mercado de Valores (the “CNMV”) issued on the 11^th of July 2023 (the “ESMA’s Opinion”).

1. Background and Rationale:

After the completion of the consultation process that the CNMV launched in November 2022 with respect to its intention to introduce additional restrictive measures on the trading of CFDs, the CNMV notified ESMA in May 2023 of its decision to ultimately proceed with the adoption of additional restrictive measures on the trading of both CFDs and certain futures and options (the “High-Risk Products”) in pursuance to its mandate under the Regulation (EU) 600/214 on markets in financial instruments (the “MiFIR”).

The CNMV’s decision, as summarised in ESMA’s Opinion has been based on a multi-faced spectrum of considerations, as outlined below:

• Significant investor protection concerns;
• Degree of complexity, transparency, and the specific features of CFDs and other High-Risk Products;
• Size of potential detrimental consequences and the degree of disparity between the expected return and the risk of loss;
• Selling practices associated with CFDs and other High-Risk Products; and
• Existing EU regulatory requirements did not sufficiently address the risks.

A. Restrictions applying to CFDs:

As far as concerns CFDs, the additional restrictive measures will prohibit their marketing, distribution, sale, and related services by means of advertising communications aimed at retail investors in Spain. More specifically:

I. Prohibition of certain marketing communications, including, inter alia, the following:

• Redirecting to a website that offers CFDs or related services;
• Sending of a contact form, an application download, or any other kind of tool intended to put the client in touch with investment service providers that offer CFDs or related services; and
• Offering of training, technical seminars, courses or sessions whenever such offers are related to CFDs or related services, including training demo accounts or tools for retail investors or which encourage using these, whenever such offers are free or have a token charge, either if they are promoted or held by the regulated entities or by related or affiliated parties.

Exclusions to the prohibition on marketing communications will be applicable when:

• • The provision of information related to CFDs is made in response to a request made upon the sole initiative of the client; and
  • The provision of the following kind of information:

• • • the one required to contract CFDs or related services that are subject to the measures;
    • to perform a transaction regarding CFDs, such as the precontractual and contractual information; and
    • the information or warnings regarding the characteristics and risks of CFDs or related services offered that are provided to investors.

II. Prohibition of any event or organisation sponsorship operation and brand advertising, including:

• the use of public figures, whenever their purpose or effect is to directly or indirectly advertise CFDs or related services; and
• the cases where such sponsorship or brand advertising does not intend to offer such products or services, in particular, when such products or services only account for a small part of the offers on the website of the firm when compared with its general activity.

III. Prohibition of certain marketing practices, including:

• Rewards to customers who provide new retail customers;
• Remuneration to marketing networks or to third parties of which their remuneration is determined based on the number of clients acquired, the cash deposits by clients, the deposits by the entity providing the investment service, or the losses by clients and, in general, any type of remuneration that may come into conflict with the interests of the clients;
• The use and remuneration of collaborators to train new potential clients without these clients having accredited knowledge and experience;
• The use of call centers which contact clients or possible clients to promote the provision of investment services regarding the instruments that are subject to the restriction;
• The use of software in which the remuneration of the software providers is determined based on the cash deposits of clients, or deposits of the distributor or losses of clients;
• The acceptance of credit card payments for cash deposits.

C. Restrictions applying to other High-Risk Products:

As far as concerns other High-Risk Products, the additional restrictive measures subject the marketing, distribution and sale to Retail Clients of other High-Risk Products to the following conditions:

• The provider of the instrument provides initial margin protection by requiring the customer to pay the initial margin; and
• The provider of the instrument will provide margin close-out protection to the Retail Client.

D. ESMA’s conclusions:

ESMA concluded that the CNMV’s proposed national measures are justified and proportionate and encourage national competent authorities (the “NCAs”) to monitor the marketing, sale, and distribution of CFDs and the impact of other High-Risk Products in their national markets to assess whether similar risks for retail investors as those identified by the CNMV exist.

E. CySEC Circular C602:

Further to all of the above, CySEC issued Circular C602  on the 12^th of October 2023, for the purposes of informing Cyprus Investment Firms (the “CIFs”) in relation to the Resolution of the CNMV on product intervention measures relating to CFDs and other leveraged products to retail investors in Spain and the corresponding Press Release that were issued during July 2023.

As already mentioned above, the said Resolution forbids the advertisement of CFDs and other leveraged instruments to retail investors as well as certain remuneration policies and sales techniques and establishes intervention measures for the marketing, sale, and distribution to retailers of other leveraged instruments. It is noted that the relevant measures are applicable from the 3^rd of August 2023 to all entities authorized to provide investment services in Spain regardless of the origin of the investment firm marketing and distributing such products, or whether there is not a branch in Spain (i.e. including entities under the freedom to provide services without an establishment).

In view of the above, all CIFs that are marketing, distributing, and selling CFDs and other leveraged products to retail investors in Spain are urged by CySEC to take all the appropriate steps and measures in order to ensure their adherence to the CNMV’s Resolution.

In case you have any questions, please do not hesitate to contact us for further professional assistance.

Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.