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Ireland’s Central Bank has become the latest body to clamp down on high risk retail financial trading, as it considers prohibiting the sale of “contracts for difference” products to retail clients in the country.

CFDs allow retail investors to bet on price movements in financial markets, covering anything from the price of gold to currencies to Apple shares, without owning the underlying assets.

But regulators in the UK and across Europe are concerned that often inexperienced retail investors are losing too much money on the complex financial products.

In a consultation paper published today, the Central Bank of Ireland said it had found that three-quarters of retail CFD clients had made a loss during 2013 and 2014, at an average of €6,900. A follow-up inspection of the largest CFD providers in Ireland over two years, ending in December 2016, found that the proportion of losing clients had dipped to 74 per cent, and losses had stemmed to €2,700.

However, “the Central Bank has observed that CFD providers typically have high levels of client turnover and short average client lifecycles”, it added.

The Central Bank said it was considering an outright ban on the products, or the introduction of measures to curb trading.

Customers deposit margin against their stake, which acts as leverage – while this can increase wins, it can also substantially deepen losses. The Central Bank said it saw leverage levels of 400:1 offered to clients who had little experience of trading – a trend that has concerned regulators across Europe.

To limit excess risks, the Central Bank proposed limiting leverage to 25:1 for all retail clients.

The Central Bank also raised concerns about the use of automatic closures of positions by CFD providers, if the client’s available margin falls below a specific level. This can lead to a customer sustaining losses which are greater than the amount they posted in leverage. “Theoretically, in the case of short CFD trades, potential client losses are limitless”, pointed out the Bank.

It proposed that CFD providers introduce “negative balance protection” – ensuring that investors cannot owe more than the money they have deposited.

The Central Bank also warned against introductory bonus offers, which it found were “often misleading”.

In line with many other European regulators, it proposed a prohibition on offering introductory bonuses, and said that CFD providers should transparently disclose risk to clients.

There are 19 CFD providers authorised in Ireland, and a further 18 who are regulated in other EU member states with branches in Ireland. But there are over 550 European companies that can offer their services in Ireland under European Union law.

An EU directive coming into force in January 2018, known as MiFIR, will allow national jurisdictions greater control over the financial products offered in their country.

Copyright The Financial Times Limited 2019. All rights reserved.

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