ESMA Targets CFDs Again: Alarm over Misleading Financial Instruments

<p>The
European financial markets regulator has prepared 40 questions that it directed
to firms offering retail investment services wanting to find out what their
operations look like in the era of trading digitalization. The document
addresses issues of gamification, the use of financial influencers, and above
all an important note regarding contracts for difference (CFDs).</p><p>In its
discussion paper, the European Securities and Markets Authority (ESMA) stated
that brokers and retail platforms should more clearly inform investors which
product is the underlying instrument and which is only a contract.</p><p>CFD or Real Share? ESMA
Draws Attention to Unclear Offers</p><p>The issues
raised by ESMA regarding clearer marking and informing about derivative
instruments concern, above all, the increasingly popular dual-stock offers in
recent times, both in the form of <a href="https://www.financemagnates.com/thought-leadership/how-cfd-trading-differs-from-real-share-trading/" target="_blank" rel="follow">real stocks and CFD stocks</a>.</p><p>ESMA argued
that European brokers often mark these instruments similarly, which can
mislead investors. <a href="https://www.financemagnates.com/terms/e/esma/">ESMA</a> suggested that information on which instrument is the
underlying issue and which is the derivative should be more legible, clearer and
easier to identify.</p><p>Firms
"may market these products alongside 'typical' shares or bonds on the same
webpage, listing them in the same tab or webpage, including presenting them as
equal or similar alternatives," ESMA explained.</p><p>In the
discussion paper, the pan-European regulator shows an illustrative example of a
broker's offer, from which it is difficult to read whether the offered
instrument is a stock or a CFD. The regulator believes that many platforms
present their offer in this unclear way.</p><p>"Furthermore,
marketing communication may be structured in such a way that does not
facilitate distinguishing whether the instrument marketed is a CFD, retail
structured product or its underlying," the regulator added.</p><p>ESMA also
draws attention to the fact that brokers often present offers to trade significantly
different instruments in one place: regulated stocks, along with commodity
contracts and unregulated <a href="https://www.financemagnates.com/terms/c/cryptocurrencies/">cryptocurrencies</a>.</p><p>"This
may lead to mis-selling of such products, especially if the unregulated
products and/or services are provided on the same webpage as regulated
ones," ESMA warned.</p><p>Financial Influencers and
Gamification</p><p>The
discussion paper further addresses a number of other issues, including the role of
financial influencers (finfluencers) in promoting the offers of trading
companies, social features of investment apps, and the progressive gamification
of the entire investment process.</p><p>Regarding
influencers, ESMA refers to research from Australia and Poland showing that
more and more young people are learning to invest from finfluencers, from
YouTube channels and websites. </p><p>"Customers
search for information online, including short videos, as they need fast,
packaged and synthesized information on demand," ESMA wrote and claimed
that this can be a dangerous approach. <a href="https://www.financemagnates.com/forex/regulating-finfluencers-france-brings-responsible-influence-certificate/" target="_blank" rel="follow">France, among others</a>, seeks to tackle financial influencers independently, as does <a href="https://www.financemagnates.com/forex/fca-to-control-finfluencers-and-illegal-promotions-on-social-media/" target="_blank" rel="follow">the UK outside the European Union</a>.</p><p>Moreover, a similar
danger can be generated by the gamification process, which, <a href="https://www.financemagnates.com/forex/regulation/esma-wants-curbs-on-gamification-of-trading-payments-for-order-flow/" target="_blank" rel="follow">according to
ESMA</a> and external research, encourages investors to overtrade. It can be
detrimental to their financial results and lead to loss of deposit.</p><p>ESMA is
waiting for the responses to the 40 questions presented <a href="https://www.esma.europa.eu/press-news/consultations/discussion-paper-mifid-ii-investor-protection-topics-linked-digitalisation" target="_blank" rel="nofollow">by 14 March 2024</a>. Feedback
"will support ESMA's convergence work and prepare it for potential
mandates for technical advice or standards in these areas."</p>

This article was written by Damian Chmiel at www.financemagnates.com.