Warning on CDFs (contracts for difference)

According to our national financial authority sellers of CDFs are unbalanced in their information to consumers and investors about risks and return opportunity.

The Norwegian Consumer Council encourages consumers to disregard offers on CDF, unless consumers themselves fully understand the nature of these products and could afford to loose more money than they are investing. Our advice to the vast majority of consumers would simply to stay away.

Also the European financial authorities ESMA and the EBA warn investors on contracts for difference. It is said in their joint press release;

“The two authorities are concerned that during the current period of low investment returns, inexperienced retail investors across the EU are being tempted to invest in complex financial products, which they may not fully understand and which can end up costing them money they cannot afford to lose.

Andrea Enria and Steven Maijoor, (Chairs of the EBA and ESMA), warned:

– Retail investors across the EU should be aware of all the risks arising from investing in CFDs. These products appear to promise investors substantial returns at a low cost but may ultimately cost them far more than they may have intended or could afford to lose.

– CFDs are complex products that are not suitable for all types of investors, therefore you should always make sure that you understand how the product you are buying works, that it does what you want it to do and that you are in a position to take the loss if it fails.”

The authorises continues to raise alertness among consumers and investors by encouraging consumers to read their agreement or contract with the CFD provider before making a trading decision.

It a good reminder but we would like to add that consumers should be on full alert also to those promises and explanations that at given orally.

ESMA and EBA encourage consumers and investor to “check if the CFD provider is authorised to do investment business in your country. You can check this on the website of the CFD provider’s national regulator”

Concurrently with the publication of this warning, the EBA is addressing an internal Opinion under Art. 29 of the EBA Regulations to national supervisory authorities on the prudential supervision of CFDs.

Splendor and failure in the MiFID II draft proposed

Consumer organizations anticipate strengthen consumer protection in sales of retail investment as the ECON Committee in the EU Parliament progresses in its work with MiFID II. In the current stages consumer organizations has reason to be reassured – but also reason to be strongly concerned.

Good news first. The MiFID II proposal provides the anticipated measures to arm financial supervisory authorities with power to hinder introduction of harmful financial products. Rapporteur, the German Member of the European Parliament Markus Ferber (EPP), plans to provide the European Securities Markets Authority (ESMA) the right of intervene and prohibit financial products that could cause consumer detriment.

Doing so, Ferber follow up the ambitions of his colleague and fellow county man Sven Giegold – the consumer champ representing the Greens – who served as rapporteur in the negotiations on the European Financial Supervisory Authorities.

Ferber also aligns with the Norwegian Consumer Councils and the demands for the domestic financial authority which we first claimed in 2009. The Norwegian Confederation of Trade Unions (LO), and the Norwegian User Panel in the Financial Market (Bif, A panel of interest organizations and trade unions) has supported this demands.

Unsuitable financial products have causes consumer detriment throughout Europe. The effect of opaque financial products containing sub-prime loans on financial stability and civil society is globally well known.

The Norwegian financial market is no exception. In the early 2000s massive push-sale of loan financed investments in structured products. As the investment was loan financed, the probability of loss exceeded prospect of positive returns for the consumer when the contract was signed. The earning for the finance industry was of course far better.  They were guaranteed earnings from fees, loan margins and cheap funding as the bond element of the structured product was placed in the bank. Just like a kinder egg. In the mid 2000s we experienced massive push-sale of illiquid property investments often loan financed as well. In the 2010s we have experienced heavy push-sales of trading platforms to consumers who couldn’t have any need for it.

This brings us over to the less positive aspects of the MiFID II proposal from Ferber.

With his amendment 71, Ferber seems to settle for transparency requirement to replace the ban on inducements proposed by the European Commission under Article 24. This is simply not good enough. The commissions study from 2010 on how consumers decide on retail investments is a solid proof that transparency requirement will be insufficient. The study demonstrated that even clearly visible warnings about sellers conflict of interest doesn’t lead to sound skepticism or reflection. 

Our own behavioral economic study on purchase of mortgages supports the Commissions’ findings. We found that consumers submit them self in client meetings with financial sellers and adopted the sellers point of view and arguments. They allow sellers to define the set up and the progress of client meetings. This imbalance comes out of lack of knowledge, financial confidence and the ability to master the setting of a client meeting.

A ban on inducements will shield sellers from conflict of interest. Their focus should be to serve the clients interest. Not his / her own neither his / her employers interest. The presents of conflict of interest makes fertile ground for bad advice. This year we published our follow-up report on how investments are sold in the present. The report shows that providers still have a low threshold to offer loan financed investments when meeting with consumers without money available. In our sample of 30 mystery shoppers, 14 were recommended loan financed investments.  

Further we found that the proportion of sales procedures which meet the requirements of MiFID in our sample was equal to the proportion in the study conducted by DG Sanco: only 40 %. This comes five years after MiFID I. Not very impressive.

Bad advice related investments costs consumer in Europe a fortune. Our German sister organization, VZBV, has estimated damages from bad advice totals up to € 98 billion – annually in Germany alone.

A ban on inducements is the best way to secure neutral and objective investments advice. A ban should not only apply to sales of only third-party products, but also distribution of their own products or products from collaborating companies.

If any kind of inducement should be allowed, it should be connected to the client’s return on the same investment. This will stimulate the financial institution to act in alignment with the interest of the client – not the interest of the constructor of the investment product or the financial institution or bank itself. We miss such considerations in.

Sellers must be able to substantiate that they give neutral and objective investments advice. This is necessary both supervisors’ needs and for their handling of possible future consumer complaints. A great deal of selling process is based oral communication. Recordings of the oral communication shouldn’t be replaced by minutes, as it is suggested in amendment 53 relating to article 16 –7. Recordings have a disciplinary effect on the financial industry and the weight of a recording in case of a dispute will have a strong evidential effect, at least more than a minute could provide.

The Norwegian Consumer Council oppose to the introduction of “risk tolerance” done in amendment 75 relating to Article 25 and the role it’s intended for. If risk tolerance is to be considered as a criterion for recommendations, it must be based on an objective evaluation done by the professional part – not clients. As long as the professional seller has responsibility for recommendation given, the seller must also take responsibility for assessment of risk tolerance. That also includes the risk of misjudging risk tolerance, which is an incomprehensible concept for most consumers.

The seller must access to all necessary information about the client to make a sound recommendation. Information on the client’s current debt included. When information on debt is available, the seller must make an assessment on whether it is a financially sound decision to make investments or rather make down payments on mortgage and / or other credit. It is first when a seller is inclined to recommend no investment he or she becomes a real advisor rather than a seller.