A guest editorial for FX News Group as published 14th August 2023
In the 2023 movie “Barbie” (spoilers ahead), Barbie’s perennial male counterparty Ken “imports” Patriarchy into Barbie-Land, and, using nothing more than beer and horse-related imagery, manages to make (almost) all the Barbies abandon their positions of power and accept submissive, Ken-serving roles. Only after the heartfelt speech of a real-world woman did the Barbies come to their senses, rejected the Patriarchy, and returned to their old Matriarch ways.
According to the Spanish financial regulator, the CNMV, as cited in an ESMA opinion from 10.07.23, Spanish retail clients are just like Barbies, when it comes to CFDs: certain market players, using aggressive and sometimes illicit marketing practices, have persuaded these “Barbie-Clients” to invest large amounts of money in CFDs – even though those products are, according to both ESMA and CNMV, generally detrimental and inappropriate for them.
As no occasional hero has managed to break the CFD spell Spanish Barbie-Clients are apparently under, the CNMV has decided to ban freedom of speech altogether in regard to Barbie-Clients and CFDs. From now on, none shall be allowed, in effect, to mention the existence of CFDs to Barbie-Clients (except if the Barbie-Client asks for data themselves, and data a provider is legally required to share).
The measures go beyond any previous measures imposed by ESMA or other EU national regulators (NCAs), limit fundamental rights, and can be compared to the ban on the advertising of cigarettes (which was done in Spain by way of law). Therefore, we believe, they necessitate a discussion around several points, not found in ESMA’s decision.
1. No Fundamental Rights Discussion
The decision limits several fundamental rights, the most obvious being the freedom of expression, which is cemented, among others, in Art. 11 of the European Charter of Fundamental Rights:
“Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers.”
Other fundamental rights one can claim are being affected by this decision are the freedom to choose an occupation and right to engage in work (Art. 15), the freedom to conduct a business (Art. 16), and the right for equality before the law (Art. 20) (as these measures apply only to Spanish retail clients, and not to others in the EU).
Despite this, reading through ESMA’s 20-page decision, the term “freedom” appears only once, in the context of the “freedom to provide services” in all EU Member States. The decision holds no real discussion around the restricted fundamental rights and their impact, for example, on the investment firms.
Think about it this way – say you were a provider of a certain legal product, which you have marketed legally; yet are now required, within a month’s notice, to stop doing so. This may mean you need to close down call centres, make people redundant, perhaps even close the company altogether. You may not even be allowed to mention CFDs in a conversation with a client from now on (full disclosure – we do NOT, to the best of our knowledge, have such affected clients). Wouldn’t you think the prohibiting decision should include some discussion about, among others, your rights, that are affected?
2. No Discussion about the State of the Union
Another element missing from the decision, in our view, is a deeper discussion about its creation of regulatory divergence, within the EU itself (as the measures would only apply to Spanish retail clients). ESMA does note it has informed and consulted other NCAs, but it does not give any weight to the extra costs and inefficiencies that come with regulatory divergence, or to the fact that these measures seem to be in contrast to the very notion of the European Single Market and the EU’s Financial Union policy.
ESMA also mentions it “Does not consider the national measures to have discriminatory effect” as they apply equally regardless on the Member State they are provided from, and that they come to address specific concerns identified by the CNMV. However, one cannot help but feel a bit uncomfortable when the Spanish regulator says it will allow its supervised entities to do to others, what it does not allow to be done to its own. In this respect, it’s worth noting the dramatic position paper issued by the AMF and AFM in January 2022, in which they proposed the exact opposite of the CNMV, meaning, to give supervision powers according to the domicile of the end-clients, not of the financial institution.
As we’ve stated back then, the ultimate goal is protecting investors, however, this should be done through centered thinking and more harmonization and digitization, to secure the safeness and soundness of the single market. The CNMV’s measures, however, seem to be a step in the opposite direction – not towards a single market, but towards a state-by-state market.
3. Factual Basis: 2-3 Year Old, Partial, Inconclusive Data
A sound decision should rely on sound data. The data presented in the decision relates to 2021, meaning, it is 2-3 years old, and is also somewhat partial, and based partially on estimates. In a dynamic, data-driven industry like Capital Markets, this seems rather lacking in the circumstances.
Moreover – the data provided does not necessarily support the measures. For example, according to the CNMV, the average loss per retail client from trading CFDs was EUR 1,649-7,269, whereas the total loss is harder to estimate, and seems to be somewhere around 170m, out of an annual CFDs trade volume of EUR 155bn in 2021 (meaning, about 0.1% loss).
As substantial as these numbers are, does an estimated EUR 170m yearly loss represent a risk to the integrity of the Spanish financial market? Does an average loss per client of several thousand Euros and about a 0.1% loss in total indicate mass deception, misinformation and pressured clients? To us it does not sound very “clear cut”, given the high-risk nature of the products. This is of course for the regulator to decide; but the decision does not include a discussion about this rather fundamental issue.
Paternalism-Materialism Instead of Patriarchy-Matriarchy
If in the Barbie movie the choice was between Patriarchy and Matriarchy; here, so it seems, the two opposites are Paternalism and Materialism. We are, of course, happy that regulators take actions to protect investors, and a certain amount of paternalism and limitation on rights is inherent to a regulator’s role. However, we believe that measures which restrict fundamental rights deserve a broader discussion, around the aforementioned points (or at least more reference to the said discussion, if held, in the final decision). This, especially as the measures go beyond previous ones, are similar to something decreed by law, and experience shows it is likely other regulators will now wish to adopt.
What the eventual outcome of these measures will be is hard to predict. Will they reduce CFD trading by Spanish retail clients? Perhaps, or perhaps will inadvertently direct them to other jurisdictions and most likely outside the EU. Will firms now focus on how to opt up clients from retail to professional opt up so that they can market CFDs to them? Highly likely, and this might very well be the next topic for discussion.
As a matter of principle, we believe the best course of action is not prohibiting (which may in itself create demand), but rather educating and supervising. If the regulator claims the obstruction of free will by marketing practices, going the other way and prohibiting education (which allows for real free will) seems contradictory. Education is key.