AFM: 'Providers of Contracts for Difference unnecessarily expose investors to risks'

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The Netherlands Authority for the Financial Markets (AFM) initiated a phased investigation into Contracts for Difference (CfDs) in the autumn of 2013. It is evident from the investigation that providers of CfDs enable their clients to invest in these high-risk products too easily. The marketing of these providers focuses on an insufficiently targeted group of investors for whom CfDs will generally not be a suitable product and the provision of information concerning the operation and risks of the product is often insufficient. The AFM urges providers to implement improvements in these areas as soon as possible.

A CfD is a financial instrument whereby two parties agree to settle the value of an underlying investment with each other at two different moments. Changes in prices of the underlying investment determine the value of a CfD. That underlying investment can be anything, including foreign currency, a stock market index or a share. A minor price fluctuation can lead to major losses as a result of the leverage of CfDs.
The AFM previously issued a warning concerning the risks of CfDs. This warning is based on previous warnings that were published by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). The AFM started an investigation into 20 providers of CfDs in the Netherlands due to persisting reports about the risks associated with these products.

French supervisor the Autorité des Marchés Financiers (AMF) recently warned that more than 89% of investors in CfDs lose considerable amounts of money. There is no reason to assume that the situation in the Netherlands will be any different, as the products offered in France are no different from the products offered in the Netherlands.

Acceptance procedure, provision of information and marketing of CfDs

It is evident from the AFM investigation that providers of CfDs do have procedures in place for client onboarding. Such onboarding procedures involve the assessment of a client’s financial knowledge and experience and also assess whether investors comply with a minimum capital requirement. However, many providers do not attach appropriate consequences to the outcome of this assessment. It is therefore easy for clients with little experience, low risk tolerance and/or capital to invest in CfDs. Although the providers’ client onboarding procedures are in line with relevant statutory requirements, the AFM urges providers to take action to prevent investors for whom CfDs are an inappropriate products from investing in this product.

The provision of information concerning CfDs by providers is generally substandard. In many of the cases investigated by the AFM, the operation and risks of CfDs were not explained sufficiently to investors. The AFM has shared its findings with the providers, who have indicated that they would implement improvements in their disclosure. Many of the providers have already done so. CfD advertisements generally comply with the relevant legal requirements, but they focus on a broad group of investors for whom CfDs will generally not be appropriate. Several providers also offer a fee for introducing new clients. The AFM considers this form of recruitment for CfDs to be unacceptable and has pointed this out to the providers.

In view of the fact that investors’ chances of loss are considerable, the AFM has also urged that clients be offered more possibilities to limit any losses from investing in CfDs. For example, this could be achieved by offering certain order types such as a guaranteed stop-loss orders, or by contractually excluding residual debt.

Foreign providers are non-compliant with European rules

A matter that complicates the AFM's supervision of CfDs is the fact that many providers do not fall under AFM supervision. These providers are active in the Netherlands from elsewhere in Europe on the basis of a European passport and fall under the supervision of the European supervisory authority that issued their licence. The AFM has concluded that several of these providers do not fully comply with the applicable European rules. The AFM considers this situation to be a cause for concern and intends to address this matter in the relevant European fora.

The AFM is committed to promoting fair and transparent financial markets.

As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.

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