Contracts for difference (CFDs) (see info box “What are CFDs?”) have a solely digital history – unlike shares, which shareholders could request to be issued in paper form until 1994. Marketing, distribution and sale activities for CFDs have always been carried out exclusively online, often on a cross-border basis. The problem is the fact that CFDs entail a high level of risk. In the summer of 2019, BaFin greatly restricted the marketing, distribution and sale to retail investors (see info box “CFD product intervention measure”). Where these restrictions are not observed, the high risks posed by CFDs for retail investors increase even more. Investors in CFDs may lose not only their invested capital, but – in a worst-case scenario – even their entire assets.

One still finds providers, especially from other EU countries, seeking to attract clients in Germany with CFD offerings that are actually illegal. All they need is the permission of their home country supervisor and a German-language website.

BaFin, which regularly monitors providers’ compliance with the specifications of the CFD restrictions, takes this into consideration. The supervisory authority also keeps an eye on providers from other EU countries. Of the 40 or so CFD providers last reviewed, a total of 48 percent were domiciled in Cyprus and 12 percent in the UK. Only 29 percent of the CFD providers are supervised directly by BaFin itself. In addition to established credit institutions and online banks, these also include institutions that specialise in CFD business

In its latest review in August 2020, BaFin identified infringements of the product intervention measure in 49 percent of the CFD providers investigated. A further 19 percent of providers deviated at least slightly from the requirements. Only 32 percent of CFD providers fully complied with the General Administrative Act (see Figure 1).

Figure 1: Infringements of the requirements of the CFD measure

It was deemed a slight deviation from the requirements, for example, when a provider did not word the risk warning precisely in accordance with the provisions of the General Administrative Act. It was considered an infringement, on the other hand, when a provider failed to provide a risk warning.

Irregularities in the case of foreign CFD providers

The providers having the most trouble correctly implementing the CFD product intervention measure are evidently the ones from Cyprus. BaFin found that of the providers investigated from this EU country, one out of every two was infringing the measure.

BaFin also found infringements in CFD providers based in the UK, Germany and Luxembourg, as well as in other EU countries such as the Netherlands, Malta and Ireland. However, Cypriot providers were responsible for about 50 percent of all detected infringements (see Figure 2).

Figure 2: Share of total infringements by country

Lack of risk warning by far the biggest problem

About 70 percent of the identified infringements of the CFD General Administrative Act were due to the fact that the providers’ notifications regarding CFD trading lacked a risk warning or that the warning was inadequate. In many cases, the prescribed risk warning was completely missing in advertising or training videos, smartphone apps, podcasts and social media contributions. It was often not positioned prominently enough: on some websites, for example, it appeared only at the bottom of the text and was thus not permanently visible. This is contrary to the requirements of the CFD General Administrative Act.

Other CFD providers are more conscientious, placing permanent disclaimers at the bottom or top of the screen, where they are visible to the investor at all times and therefore compliant with the requirements.

In second place, comprising 13 percent of the infringements found, were deviations from the requirements for leverage limitation. Providers were offering leverage at irregular levels, especially for CFDs involving bonds and exchange-traded funds (ETFs) as underlyings. The CFD General Administrative Act does not include ETFs or bonds among the underlying asset categories, which is why they fall under “other”. This means that an initial margin of at least 20 percent and a maximum leverage of five apply.

About nine percent of providers tried to motivate investors to trade in CFDs by offering bonus payments. However, CFD providers are not permitted to grant investors monetary or non-monetary benefits.

BaFin considers it a positive sign that it identified only one individual case involving deviations from the condition requiring initial margin protection and one involving deviations from the ban on additional payment obligations. All the other CFD providers reviewed excluded additional payment obligations for retail clients in their legal documents (special terms and conditions for CFDs, general terms and conditions, etc.).

Investigation and sanctions in Germany and abroad

Infringements of the CFD General Administrative Act constitute an administrative offence under section 120 (9) no. 30 of the WpHG and are subject to BaFin’s investigation and the imposition of a fine. BaFin makes German providers aware of the infringements identified and initiates administrative enforcement measures if they do not remedy the deficiencies found.

BaFin cannot directly take supervisory action when foreign companies utilise the European passport to offer CFDs to retail investors in Germany. It refers such cases to the relevant foreign supervisory authority, who then investigates the infringements as part of its own supervisory activities.

Publication of guidelines

To minimise infringements of the CFD General Administrative Act, BaFin published interpretative guidance called “Guidelines on the General Administrative Act of 23 July 2019 regarding contracts for difference (CFD)” at the beginning of September 2020 (see interpretive guidance on the BaFin website dated 29 September 2020 ). In it, BaFin presents the situations identified in the review of the CFD measure as being particularly problematic and vulnerable to infringements.

BaFin will continue to check whether CFD providers are complying with the product intervention measure and observing the interpretive guidance. Where necessary, BaFin will take action to counter infringements by taking administrative enforcement measures and imposing fines.