Updated Q&As on MiFID
On 1st of June 2016 the European Securities and Markets Authority (ESMA) has published an updated version of its question and answer document (Q&A) on the application of the Markets in Financial Instruments Directive (MiFID) to the marketing and sale of financial contracts for difference (CFDs) and other speculative products to retail clients (such as binary options and rolling spot forex).
The Q&A includes a new question and answer in section 2, which addresses conflicts of interests arising from business models that firms offering speculative products to retail investors may adopt. In particular, ESMA clarifies the conflicts of interest aspects that national competent authorities should consider where a firm uses other parties to perform activities on its behalf and highlights that firms must manage conflict of interests that may arise as a result of remuneration between the parties, which could incentivise behaviours that are not in the best interests of retail clients.
The complexity of CFDs and other speculative products means it may be difficult for the majority of retail investors to understand the risks involved although they are widely advertised to the retail mass market by a number of firms, often via online platforms. There is also a considerable degree of cross-border activity across Europe in these products. Many competent authorities have concerns about the protection of investors in this area and the purpose of the Q&A is to promote common supervisory approaches and practices in the application of MiFID and its implementing measures to key aspects that are relevant when CFDs and other speculative products are sold to retail clients.
ESMA will continue to work on this topic and aims to publish further Q&As in the coming months. ESMA will also consider the need for any further work, in the medium term, in light of MiFID II requirements.
The Q&As are targeted at competent authorities. However, the answers are also intended to help firms by providing clarity on MiFID rules.