They saw Sean Quinn lose billions when he built up a clandestine 28 per cent stake in Anglo Irish Bank between 2006 and 2008 using the product. Now the Central Bank is considering banning the sale to retail investors of contracts for difference (CFDs), a derivative-type instrument that allows investors to speculate on the short-term price movements of an asset, such as shares or oil prices.
Michael Hodson, director of asset management supervision at the Central Bank, said: "CFDs are complex products which are widely advertised to the retail mass market in an online setting. It is timely for the Central Bank to take further and decisive action in relation to CFDs, given the evidence that the probability of loss for consumers is very high. "
On Monday, the regulator published a consultation on the topic, looking to examine how the interests of retail investors can best be protected when it comes to the products. In the report, it says that it is considering the option of prohibiting the sale or distribution of CFDs to retail clients in and from Ireland.
“The Central Bank is also considering a restriction or prohibition of the marketing of CFDs in conjunction with this measure,” it says.
Readily available
CFDs are readily available in Ireland. There are 19 investment firms currently authorised here that have the capacity to distribute CFDs, while a further 18 firms authorised in other EU member states, have established branches in Ireland and also have the ability to distribute CFDs, the Central Bank notes.
Banning the sale of the products to retail investors “could have the greatest impact in terms of limiting investor losses”, the Central Bank says.
Indeed a study by the Central Bank in 2015 found that 75 per cent of retail CFD clients who invested in CFDs during 2013 and 2014 made a loss, of which the average loss was €6,900. A follow-up study in 2016 found that 74 per cent of retail clients lost money, with an average loss of €2,700.
The Central Bank is also considering imposing further restrictions, including introducing a leverage limit of 25:1 on trades. Currently, leverage levels of 400:1 are offered to retail clients with minimal experience of trading CFDs. This means that someone opening a new CFD trading account with an initial deposit of €100, could assume a €40,000 exposure in a single trade.
“With only a small percentage of the overall contract value deposited as margin, it is often difficult for retail clients to have an appreciation of the quantum of risk being assumed when trading CFDs,” the Central Bank said.
The regulator also raises the issue of marketing efforts, pinpointing introductory “trading bonuses”, which can incentivise clients to trade more aggressively than would otherwise be the case and can result in greater losses being suffered. The bank says it is also considering banning any form of trading incentive or opening bonuses.
Interested parties can make a submission by May 29th, 2017.
