Central Bank restricts sale of contracts for difference

The Central Bank has invoked new powers to restrict the sale of speculative financial derivatives known as contracts for difference (CFDs) and ban the marketing of binary options, which it says amount to nothing more than betting on a horse race.

The move will take effect immediately after temporary strict restrictions imposed last year by the European securities regulator on CFDs and binary options expire. The European measures are currently due to run out in July.

CFDs – a favoured way for Irish high net worth individuals to take a bet on stock movements before the crash – attracted considerable attention after the family of the country's then richest man, Seán Quinn, built up a clandestine 28 per cent stake in Anglo Irish Bank between 2006 and 2008 using the products.

Assets

CFDs allow investors take a leveraged bet on assets from shares to oil prices, with an initial outlay of as little as 10 per cent of the value of the investment. However, when CFD bets start to make losses, brokers call on the investor to make up the difference in what is called a margin call.

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Mr Quinn said in court in 2014 that, all told, his family lost €3.2 billion on its leveraged investment in Anglo Irish Bank, which was nationalised in 2009 and put into liquidation four years later.

Binary options allow investors to speculate on the short-term price movements of an asset. The potential outcome is predetermined, with the investor usually losing their initial investment if their prediction is wrong or a fixed payout if they are correct.

"The Central Bank is banning the sale of binary options to retail investors as we consider them a fundamentally flawed product, which have no place in the investment plans of retail investors. They are no more an investment than betting on a horse," said Derville Rowland, director general for financial conduct at the Central Bank.

“Based on our ongoing work on CFDs at a domestic and EU level, we have concluded that retail investors must be protected from excessive levels of leverage, which can result in unexpectedly high levels of losses and from the risk of losing more money than they put into their CFD account.”

The CFD restrictions include limits on leverage – or debt – used to place bets and a requirement that small investors cannot lose more money than they put into their CFD account. They also ban the use of incentives to entice retail investors to get involved in CFDs as well as an obligation on brokers to warn clients of the risks of these instruments.

Powers

The Central Bank received powers last year to prohibit the sale of certain products.

EU research in recent years has revealed that up to 87 per cent of retail clients incurred losses when investing in binary options, according to the Central Bank.

On CFDs, a Central Bank inspection published in 2015 found that 75 per cent of retail CFD clients made a loss. The average loss was €6,900. A follow-up review of a sample of the largest CFD providers in Ireland in 2017 found that, in the two-year period up to the end of 2016, 74 per cent of retail clients lost money with an average loss of €2,700.