Finance industry actors offering so-called CFDs sneak around consumer protection rules by letting retail clients call themselves professionals and get an advantage. Now, ESMA raises a finger of warning.

Any form of practice that “incentivises, induces or pressures an investor to request to be treated as a professional client” is a potential target for action by the European Securities and Markets Authority (ESMA), in its duties to protect European retail clients from financial risks they are not apt to handle.

This is evident from a statement, made by the authority in July, regarding market practices around so-called contracts for difference, CFDs. While these highly leveraged contracts can be efficient tools for achieving desired hedges or asset exposures with small investments, they can also cause great losses quickly.


Warns against circumvention

“Ensuring investors are protected necessitates that all CFD providers respect all applicable requirements and do not circumvent them using professional client status or third country entities,” ESMA writes.

It further adds that “any form of promotional language in relation to the status of professional client shall be seen as incentivising a retail client to request a professional client status. This includes providing a comparison between leverage limits available to different types of clients and the provision of any form of rewards for becoming a professional client.”