ESMA to inspect brokers’ professional clients practice

The new announcement was published by the European Securities Markets Authority (ESMA) confirming that the validity of the CFD restrictions will be extended again. It is not surprising after FCA has changed the status of restrictions from temporary to permanent.

As the only regulators capable of making the restrictions permanent are the local regulators, it is expected that ESMA restrictions on CFDs will be prolonged again and again. The new extension is valid for three months from today, 1th February. The next extension is already scheduled for the second half of the April and will become effective from the 1st of May.  As ESMA continues its restrictions on CFD yet only FCA and BaFin are the only regulators in Europe which are actively involved in communicating with retail brokers about changes and their intentions.

The number of professional clients has increased

It does not come with a surprise that many of the brokers are trying to find a way to reduce the negative impact of ESMA  and especially FCA restrictions on its business. Reclassification of the clients from normal customers to the professional clients has already become a common practice and ESMA is now closely watching brokers. Some of the brokerages are implied to have violated the restriction on suggesting the customers change their status to professional trader.  Only traders are allowed to request reclassification by themselves and the broker should accept the request or deny it based on the trading records of the client.  As national regulators have reported to ESMA the number of professional clients has grown significantly compared to a year ago.

As the regulator states ESMA is aware that brokers providing CFDs are advertising the possibility of becoming professional clients on a request to the retail traders. The regulator elaborates that only customer may request to get the status of professional clients and advertising this possibility to every retail customer is out of the rules. The broker must ensure that customers comply with all applicable legislative requirements that allow clients to obtain the status of the professional trader. 

ESMA has also stated that they are well aware of third-country firms activity, as they are actively approaching European Union clients, or that some of the CFD providers that are operating in the EU are now marketing the possibility for retail clients to move their accounts to a third-country entity.  As per as regulations it is allowed for the third-country firms to offer services to EU clients explicitly on their own request. Now the EU watchdog is monitoring the brokers closely to determine if any other Union measures are appropriate.

Client costs have declined but profitability is unchanged

According to the ESMA statement in the first three months of CFDs limitation clients have paid lower amounts to their brokers. Over the three month period until October 2018 retail clients have had significantly lower costs for trading CFDs. In addition to that, there was a decrease in the number of automatic close-outs and times when accounts went into negative equity. With this, the size of negative equity balances has also been decreased.  While the costs for CFD trading was lower as ESMA states the profitability is unchanged compared to the same period in last year.