BaFin criticises Cypriot based CFD brokers’ compliance with domestic German regulations

23rd Dec 2020

In August 2020 Germany’s Federal Financial Supervisory Authority (“BaFin”) reviewed both domestic and foreign brokers’ compliance with local regulatory requirements relating to the marketing, sale and distribution of Contracts for Difference (“CFD”) and announced the results of its review on 18 December 2020. It found that half of the CFD providers based in Cyprus that provided passported services in Germany were not in compliance with these requirements.
BaFin’s General Administrative Act of 23 July 2019 (the “CFD General Administrative Act”) imposed a number of restrictions on the marketing, distribution and sale of CFDs which from 1 August 2019 allowed the provision of CFDs to retail clients in Germany only where providers satisfied the following five conditions:

1. Leverage was limited, with limits dependent on the category of product underlying the CFD;
2. Margin closeout protection was provided to investors;
3. Negative balance protection was provided;
4. No bonuses were provided to retail investors; and
5. Communications from CFD providers included appropriate risk warnings.

BaFin found that approximately a third of the total number of CFD providers reviewed did not comply with its requirements. A further fifth of the total reviewed deviated from its requirements by, for example, not wording their risk warning precisely in accordance with the terms of the CFD General Administrative Act.

Its country-by-country analysis determined that the providers that had the most trouble correctly implementing the CFD General Administrative Act were those based in Cyprus. Cypriot CFD providers constituted 50% of the total population of non-compliant CFD providers (including those based in Germany), followed by CFD providers based in the UK which made up 12% of the relevant total.
In terms of the type of CFD General Administrative Act infringements identified, BaFin found that the majority (70%) related to CFD providers’ notifications that either lacked a risk warning or contained an inadequate risk warning. In many cases the necessary risk warning was missing from advertising or training videos, smartphone applications and social media contributions. BaFin also found that in certain instances it was not displayed prominently enough or was not always permanently visible. The next most common infringement was deviation from requirements relating to leverage limits. CFD providers often provided leverage at irregular levels, in particular for CFDs based on bonds or exchange traded funds.

According to BaFin’s press release contraventions of the CFD General Administrative Act constitute an administrative offence and may incur the imposition of fine. However, as BaFin cannot take direct supervisory action against CFD providers passporting their services into Germany, it has referred each infringing CFD provider to its home member state supervisory authority. In order to minimise infringements of the CFD General Administrative Act, BaFin published interpretative guidance at the beginning of September 2020.

If you are interested in finding out more about the matter or would like to ensure that your company is compliant with foreign regulatory requirements, our investment services and funds team may be able to assist you. Please do not hesitate to contact us.

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