FSMA Regulation governing the distribution of certain derivative financial instruments (binary options, CFDs, etc.)

For some time now, the FSMA has been noticing that various types of particularly risky financial derivatives are being distributed to the public in Belgium via electronic trading platforms. In the past few years, the FSMA has received numerous complaints, with new ones arriving almost every day.

Some of the complaints refer to providers acting without authorization to offer financial services or products. Their offers thus constitute investment fraud. On the FSMA's website, there is a list of companies operating unlawfully in Belgium, which also indicates what products they offer.

The FSMA takes the view that these particularly risky financial derivatives are not suitable for retail investors. The instruments are, moreover, marketed to the general public in a particularly aggressive manner. The FSMA often notes that such instruments are even offered to senior citizens, the unemployed, people in financial difficulty or consumers who clearly do not have the requisite knowledge and experience. That is one of the reasons why the Regulation also prohibits certain undesirable marketing methods.

The Regulation serves not only to protect the specific interests of consumers, but also to contribute to ensuring the integrity of and public confidence in the financial sector.

Other countries have also banned the distribution of such instruments. For example, the United States, Israel and Japan have adopted regulations restricting or banning CFDs and/or binary options. In some countries, the use of leverage has also been prohibited (Hong Kong, United States, Japan and Singapore).

The Regulation consists of two elements. The first element is a ban on distribution to consumers via electronic trading platforms of:

• binary options;
• derivative contracts whose maturity is less than one hour;
• derivative contracts with leverage, such as contracts for difference (CFDs) and rolling spot forex contracts.

The second element is a ban on a number of aggressive or inappropriate distribution techniques ('cold calling' via external call centres, inappropriate forms of remuneration, fictitious gifts or bonuses, etc.) used when distributing OTC derivatives to consumers.

The Regulation applies only to what are known as OTC instruments. It therefore does not apply to the distribution of instruments traded on a regulated market or on a multilateral trading facility operated by a market operator. These two types of market infrastructure allow buy and sell intentions to come together and are thus multilateral in nature. The FSMA considers that this multilateral element, as well as the settlement systems associated with it, in itself represents a guarantee to the consumer. For this reason, it does not seem advisable at this stage to extend the prohibition to those types of instruments.

The Regulation entered into force on 18 August 2016.

Binary options and instruments with a short maturity are extremely risky, even arbitrary, and have nothing in common with an investment or a financial transaction. These instruments are comparable to a game of chance in which, mostly over a very short period of time, bets are placed on the change in an underlying asset. Such an instrument is binary in nature: either the consumer receives a predetermined payment if the underlying asset moves in the direction chosen, or if it does not, the consumer loses the entire investment. Such instruments have no link to the real economy and are therefore purely arbitrary. Instruments of this nature thus do not permit the investor to make an investment in the classic sense of the term.

Where leverage is used, the amount of profit or loss may often be greater than the amount the consumer actually invested. The profit or loss can even be a multiple of the amount invested. In other words, the use of leverage can result in the consumer losing a higher amount than he or she invested, even if there is little change in the value of the underlying asset.

Moreover, the use of leverage also means that the client may lose his or her position more quickly. For example, if leverage is set at 5 (that is, the amount actually invested by the consumer – the margin – represents 20% of the position), this means that a movement of 20% in the value of the underlying asset means a loss of the total amount invested. Minor shifts in the market can thus lead to a complete loss of the investment.

The Regulation applies to all providers of unlisted financial derivatives who, on a professional basis, distribute to one or more consumers derivative instruments that are traded via an electronic trading system. The Regulation targets the distribution within the territory of Belgium by any person, regardless of the nationality or the place of establishment of the person distributing the instruments. As a consequence, the Regulation does not apply to distribution abroad carried out by a person established in Belgium.

The Regulation applies to offers made to the public. It therefore follows that a request for approval of a prospectus for transactions forbidden under this Regulation cannot be validly submitted to the FSMA, and that the FSMA cannot approve such a prospectus.

The Regulation applies only to the distribution of instruments that are traded via an electronic trading system (any form of electronic infrastructure by means of which a financial instrument is traded).

Distribution within the meaning of this Regulation does not require the product to be proposed to a minimum number of clients or potential clients. This means that contact with one consumer is sufficient for that contract to be considered distribution within the meaning of this Regulation.

The term 'distribution' refers to 'presenting the product, in any way whatsoever, with a view to encouraging the client or potential client to purchase, subscribe to, adhere to, accept, or sign up for or open the product in question'.

To determine whether distribution in Belgium is involved, it is necessary to establish whether distribution is addressed to the Belgian public.

This can be done on the basis of indications such as the presence of specific information about the Belgian legal (and in particular tax) regime, a reference to contact persons in Belgium, the absence of a disclaimer stating that the distribution is not addressed to the Belgian public, the languages used, the possibility for Belgian clients to subscribe on line, etc. The fact that the company has announced its intention to offer investment services in Belgium in the context of the free provision of services also indicates whether or not distribution is directed specifically to the Belgian public. If advertising is carried out via media within the territory of Belgium, this will also be considered distribution in Belgium. If a provider has a large number of Belgian clients, that can also be an indication that the provider has been carrying on distribution in Belgium.

The Regulation is addressed to the providers of such instruments, and not to the Belgian consumers. If a consumer has taken the initiative to contact a provider without any prior action taken by that provider, then no 'distribution in Belgium' is involved. A website without any references to Belgium and without any advertising or campaigns in Belgium (e.g. advertisements, banners, letters, phone contacts, etc.) thus does not fall within the scope of the Regulation.

The FSMA points out that offering binary options, CFDs and forex instruments via the Internet is very risky and can give the impression of fraud: anyone who invests in binary options, CFDs or forex instruments runs the risk of losing the entire sum invested. The chance of loss is much greater than the chance of gain: studies conducted by other European supervisors among investors show that at least 75% to 89% of the investments in derivative products, such as binary options or forex products, generate losses. These products are appropriate only for those who really wish to speculate, are prepared to lose the entire amount invested or even more and are familiar with derivative financial products. A considerable amount of fraud has also been detected with such instruments. In a number of cases, it was found that no actual transactions were ever carried out by the provider.

During the two months following the entry into force of the Regulation (in other words, until 18 October 2016), the distribution of the derivative instruments it refers to is permitted, but only in order to settle transactions that were already in progress at the time the Regulation entered into force. This means that the transitional regime can be applied only in cases where the settlement of instruments requires subscription to a new derivative banned under the Regulation.

Existing positions can, however, continue to be held after 18 October. The Regulation does not stipulate that an online provider of the instruments referred to in the Regulation must close down the existing trading accounts of Belgians, but rather that no distribution may be carried out in Belgium.

The Regulation applies to distribution to consumers. A consumer is 'any natural person who is acting for purposes which are outside his or her trade, business or profession'.

The Regulation thus does not apply to distribution to investment professionals (such as portfolio managers, etc.) or to financial activities (such as investment decisions taken by professionals) that do not fall within the notion of distribution.

Distribution of the instruments in question to a natural person who carries out a commercial, business, trade or professional activity thus falls within the scope of the Regulation if that person is acting in the capacity of managing his or her own private assets (and thus outside of his or her occupational activity).

It follows from this definition that the Regulation does not apply to distribution to legal persons and that distribution of derivative instruments to companies does not fall within its scope.

The FSMA can impose administrative measures (e.g. warning, order, penalty) or an administrative sanction (monetary fine) on providers who fail to comply with the Regulation. In this regard, the FSMA points to a recent sanction for a provider of derivatives.

The FSMA does not have the legal power to recover lost money.

If you consider that you are the victim of investment fraud, we advise you to file a complaint with the police or the judicial authorities.

If you have a complaint about an authorized foreign provider, we advise you to file a complaint with the competent foreign supervisor and/or the competent foreign ombuds service.

A list of the competent national supervisors is available on the website of the European Securities and Markets Authority, ESMA.

A list of the competent ombuds services is available via the Financial Dispute Resolution Network (FIN-NET).

The Regulation applies only to OTC instruments. A consumer will thus continue to be able to hedge against certain risks (e.g. exchange rate risk) by using a derivative that is traded on a regulated market or a multilateral trading facility.

Moreover, the Regulation applies only to distribution to consumers. Distribution to a natural person who carries out a commercial, business, trade or professional activity does not fall within the scope of the Regulation if the person is acting outside the capacity of managing his or her own private assets. Under the Regulation, a natural person will be able at all times to hedge his or her professional activity with OTC derivatives.

The Regulation likewise does not apply where derivative instruments are distributed to consumers who have asked their financial institution to treat them as professional investors in application of Annex A, II of the Royal Decree of 3 June 2007 laying down rules for the transposition of the Directive on Markets in Financial Instruments.

No, the Regulation does not apply to the granting of derivative financial instruments as part of the performance of an employment contract. Share option plans thus do not fall within the scope of the Regulation. The granting of this type of compensation within the framework of a self-employed service agreement falls outside the scope.

At the moment, Belgium is the only country in Europe that prohibits the distribution of certain derivatives to retail investors.

The problem of the offer of binary options, CFDs and forex instruments is not a purely Belgian phenomenon. It arises throughout Europe. In this regard, please see a recent warning by the European supervisory authority, ESMA.

Some other countries have taken restrictive measures relating to the distribution of such instruments (see also question no. 1 above).

The French supervisory authority, the AMF, recently prohibited a foreign provider of binary options, CFDs and forex instruments to continue offering investment services within France.