CySEC urges CFD brokers to pay attention to Spanish marketing requirements
The Cyprus Securities and Exchange Commission (CySEC) today issued a circular, drawing the attention of Cyprus Investment Firms (CIFs) to a recent statement by Spain’s securities market regulator CNMV. The statement warns of certain bad practices in cross-border marketing of investment services, including CFD trading, by investment firms located in other EU countries.
In particular, the public statement refers to certain inappropriate, common practices followed by some brokers. It contains a series of guidelines for due compliance with applicable rules and regulations. The aforementioned practices include, but are not limited to, the use of (i) aggressive marketing, (ii) unauthorised third parties to carry on the IFs’ marketing activities (e.g. affiliates, call centres, etc.), and/or client acquisition, and (iii) common websites in Spanish to market the activities of third country firms within the EU.
The public statement, which also refers to the use of references to third-country entities within a group for marketing purposes, includes some specific requirements for financial intermediaries operating in Spain, particularly those specialising in the marketing of CFDs or other complex products, in order to guarantee appropriate retail investor protection.
CySEC expects all CIFs that provide investment services in Spain to take, where necessary and by way of urgency, appropriate actions and measures to adhere to the content of the CNMV’s public statement and to the relevant requirements included therein.
The Cypriot regulator stresses that the content of the CNMV’s public statement will form part of CySEC’s supervisory assessments.
Let’s recall that CNMV has been looking at taking action against brokers from certain EU countries. FNG has viewed a strategic document issued by CNMV as part of its 2019 strategic review, stating that it has set up a committee under the direction of Chairman Sebastián Albella to look at the practices of many of these (licensed) foreign brokers offering services to Spanish traders.
The regulator is looking mainly at Cyprus-based CFD brokers, and what the CNMV feels are overly aggressive tactics and practices. Overall, Spain has about 200 domestic licensed financial institutions, while about 3,500 EU “passporting” firms – mainly foreign FX and CFD brokers – have received permission to service clients in Spain.
The regulator said it is looking in particular at brokers which seem to habitually engage in the following practices:
- Encouraging Retail clients to register as Professional clients. This allows the brokers to afford these “Professional” clients more leeway, and in particular more leverage.
- Encouraging clients to transfer their accounts to related offshore entities. Since the ESMA-led reforms of 2018, many licensed EU brokers have set up offshore subsidiaries operating under the same brand. The brokers then wave their EU license at clients to assure them that the broker is “solid” and respectable, but encourage the client to formally open their account with the broker’s offshore entity. That way the broker can use acquisition and retention tactics illegal in the EU such as offering deposit bonuses or trading volume bonuses. It also allows the client to use more leverage than in the EU. And as an added benefit, it allows the broker to not have to hold capital against the client’s account balance, as required in the EU.
- Misleading Advertising, such as zero commissions and fees, when in fact the commissions and fees are disguised in other transaction costs.
- Affiliate Programs, whereby fiduciaries are incentivized to encourage their clients to churn their accounts and trade high volumes.
The CNMV said back then it will monitor closely a number of specific firms as well as the overall practices of foreign brokers operating physically or virtually on Spanish soil. However it did note that it is considering specific action which could include the banning of large numbers of foreign brokers.