Topic Consumer protection BaFin restricts CFD trading
The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) today issued a General Administrative Act pursuant to section 4b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). The General Administrative Act restricts the marketing, distribution and sale of financial contracts for difference (CFDs). Contracts with an additional payments obligation may no longer be offered to retail clients.
“By restricting trading in CFDs we are making use for the first time of the product intervention option”, explains Executive Director Elisabeth Roegele in relation to BaFin's measure. BaFin has significant investor protection concerns regarding CFDs with an additional payments obligation, as such products involve an unforeseeable risk of loss for retail clients. The risk of loss is not limited to the client's margin payment but instead may encompass the entirety of their assets and can amount to multiples of the capital invested. “For consumer protection reasons, we cannot accept that. The restriction of CFD trading is therefore a necessary step to protect retail investors”, says Roegele, explaining BaFin's decision to intervene.
Providers of CFDs with an additional payments obligation have three months from the date of publication of the General Administrative Act to adjust their business models. Some providers already offer CFDs without an additional payments obligation or have, because of the planned General Administrative Act, announced that they will in future offer such products.
CFDs are arrangements between two parties which speculate on the price performance of a certain underlying, such as shares, indices, currency pairs or interest rates. The investor speculates on positive or negative price changes for the underlying. When the price of the underlying changes, the corresponding price gains or losses are mirrored by the CFD. If the difference is positive, the investor is paid the difference amount by the CFD provider; if the difference is negative, the retail investor must pay the difference to the CFD provider.