Last week Spain’s financial regulator, the Comisión Nacional del Mercado de Valores (CNMV), introduced a new set of regulations governing the CFD sector.
The new rules are pretty extreme and effectively ban the marketing of CFDs to retail clients in Spain. They also ban IB / influencer-style marketing, advertising using events, or getting famous people to market the services as well.
Typically when I hear about things like this, I get all despondent and think, “well that’s that then, the industry is toast.” But then I remember I believe in laws and regulations and stuff, whereas this industry approaches things more like a smoking ban in the Balkans. Yes it’s there in practice but then most people ignore it anyway.
Nonetheless, the rules do create some interesting questions for the industry that are worth looking at.
What happens to sports sponsorships?
Spain is not the first country to enact a ban on CFD advertising. France did it a few years ago but, much like our smoking ban analogy, it seems to have been enforced in a relatively haphazard way.
For instance, eToro has been Monaco’s sponsor since 2021, which would seem to be completely against the logic of the rules. But then in other instances, the regulator has been strict in enforcing them.
For example, Atalanta games are banned from being shown in France because Plus500 sponsor them. There was also controversy about Atletico Madrid games being shown in the country when Plus500 sponsored them. A trade body actually went to court (and won), saying that the Europa League Final shouldn’t have been broadcast in France.
This leads to an interesting question as to what will happen to some of the La Liga sponsorship agreements that are currently in play.
For instance, almost the same day that the CNMV announced the marketing ban, AUS Global announced it had signed an agreement to sponsor Real Betis, with its branding appearing on the players’ shorts. Presumably that shouldn’t be permitted under the regulations but it seems like it will just happen anyway?
Can you enforce the rules?
There is also typically lots of wiggle room with these sorts of rules. Let’s say I’m a guy that makes YouTube videos about drawing random lines on SPX charts and pretending there’s meaning to them. My videos are in Spanish and a broker sponsors them, maybe with an affiliate link or something similar.
In theory, this should not be permitted under the regulations. In practice it’s not difficult to say, ‘hey, I wasn’t targeting clients in Spain, I just make videos in Spanish’. Is this against the rules?
To be fair, some brokers have done similar things in the UK (eg. BDSwiss) and they just got banned, so it’s plausible something similar could happen, but the wider point remains that it would be hard to stop this sort of behaviour.
The same is arguably true of sponsorships with sporting figures. For example, if I have an agreement with Cristiano Ronaldo and he posts about it on Twitter or Instagram, then it’s hard to see how you could stop him from doing that.
Finally, you might be able to use a subsidiary or partner company offering other products to circumvent the ban.
For example, I am currently being hit by a wave of corny banner ads from IG Group telling me to ‘invest in myself’ and buy stocks with them. There are none of the ‘X% of clients lose money’ warnings on these adverts because it’s for their investment service.
The CNMV’s ban only applies to CFD providers, so presumably you could advertise your alternative product that’s sold via a subsidiary, then end up bringing clients to the same website or app anyway.
Potential ban?
Leaving these sorts of loopholes aside, the point remains that the regulator clearly doesn’t like CFDs, which is unlikely to surprise anyone reading this article.
The question to me is how much further things can go. At this point, the next limitation would probably be that you can only offer them to professional clients, which would be close to a ban on the products given how small a segment of the customer base professionals are.
Whether or not this happens depends on the jurisdiction. For instance, as much as the FCA hates CFDs, they probably wouldn’t want to kill the industry, given that you have three large companies listed on the London Stock Exchange that offer them.
CySEC would presumably put themselves out of business by banning the industry so they won’t do it either.
However, for other parts of Europe it seems entirely possible that they could. If you took France as an example, it’s an industry that employs a tiny number of people and that the regulators see as being overwhelmingly negative for customers. From their point of view, why would it be so bad to ban CFDs or limit them to only professionals? The same could be said of Spain and plenty of other countries in the EU.
Bad logic
What makes this outcome more likely is the fact regulators have decided client losses should define whether or not to keep hammering the industry.
I understand the thinking here but if you are signing up to a company that has massive warnings about how risky their products are and the proportion of clients that lose money, you can’t really argue that you didn’t know what you were getting into. At this point it’s close to getting mad at a tobacco company because you didn’t know cigarettes were bad for you.
The other factor is that a huge number of professionals in the hedge fund sector also end up crashing out. The failure rate of small hedge funds over 12 month periods is sometimes >10% of ALL similar funds that are active.
In fact, if you look at fund liquidations and compare them to fund launches on an annual basis, it kind of looks like the churn rate of a broker, with most funds – and analyses typically don’t include those that blow up in 12 months – dying in a relatively short period of time.
I guess you could take this two ways. If the pros can’t do it, then there is no way retail should be able to access similar products. Alternatively, saying clients losing money means they aren’t suitable for them may not be the best metric, given that even pros struggle to make money from similar strategies.
Time to change
Regulations like the ones Spain has just put in place are also clearly pushing companies to try new things. You could argue that brokers have proven resilient since ESMA’s changes came into play. Alternatively, you could say we are going through a slow burn that’s slowly pushing companies out of the industry or forcing them to do new things.
One of the points we’ve made here a lot is that other exchange-traded derivatives are one of the new things that brokers can do and this is why more companies are adding them.
But seeing as we’re talking about ‘stuff regulators hate’, the next part of the industry they’re going to hate will be prop shops. There are already white label providers set up so that you can launch one and there is, from what I can see, basically no regulation covering this side of the industry. Leaving aside marketing and trading conditions, all you have to look at is the terms of how to get funded to see things will not end well here.
But hey, regulators are typically slow to move, so it will probably be 3 – 5 years until you start to get regulation in Europe on this part of the industry as well. By that point there will probably be some new thing to sell anyway.
