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FCA advises of regulatory finding from CFD Firm review

2nd February 2016

The Financial Conduct Authority today issued Dear CEO letters to those firms offering Contracts for Differences (CFDs) to clients, including Spread Betting Providers and those offering Rolling Spot FX. CEO’s of CFD firms must now review their firm’s practices to ensure they are compliant with regulatory requirements.

Client On-boarding (Client Take-on)

The topic of the Dear CEO letter to CFD Firms was largely with regards to firms’ client take-on procedures, how firms conduct their business and which systems and controls are in place.

Ten CFD firms within the industry were reviewed, with the regulator finding that many of these firms had procedures they considered inadequate to comply with their regulations.

Regulator’s Areas of Concern in relation to CFD Firms:

Most notably, the FCA found that in on-boarding clients, firms:

had often not adequately assessed clients to ensure CFD trading was suitable for them;
had issued inadequate risk warnings to those that had not passed the appropriateness assessments
had carried out insufficient anti-money laundering measures in relation to higher risk clients and often based a client’s ‘risk’ level largely on jurisdictional risk rather than a range of risk factors.

The result of these findings suggest that some CFD firms may not be treating their clients fairly or acting in their clients’ best interests, thus breaching compliance with the FCA’s Principles for Business and their Conduct of Business rules.

In addition, due to the concern over firms’ AML systems and controls, the FCA feels that firms may be failing to do enough to prevent financial crime.

Inadequate Appropriateness Assessments

It was noted from the regulator’s letter that they consider CFDs to be ‘complex’ since these leveraged products “can put clients at risk of losing more than their original investment.”

As such, much emphasis of the Dear CEO letter was placed upon whether firms are doing enough to assess whether CFDs are appropriate for their clients and in particular that firms should be:

Gathering sufficient information relating to the types of service, transaction and designated investments a client is familiar with.
Ensuring CFDs are appropriate for clients by assessing their relevant knowledge and experience
Taking into account transactional experience of the client including the nature, volume and/or frequency of this or the time period over which these transactions had been undertaken
Taking into account a client’s educational, professional and career background that might be relevant to the appropriateness assessment
Ensuring that adequate investment risk warnings are provided to clients to ensure that the nature and risks of CFD products are presented in a manner that is clear, fair and not misleading.

What should CFD Firms do now?

The ‘Next Steps’ as advised by the regulator is for CEOs to review their firms’ processes in relation to the FCA’s areas of concern as firms need to ensure they fully comply with their regulatory requirements when offering non advised, execution only sales of CFDs.

CFD Client On-Boarding Review Support

Our compliance consultants are specialists in the financial markets, offering a good understanding of the commercial as well as the regulatory aspects of Derivatives Brokers including Forex, CFD and Spread Betting providers amongst others.

Our Regulatory professionals can assist with any regulatory requirement you may face and can assist with:

Anti-money laundering procedures and controls
Appropriateness assessments
Client on-boarding procedures
Client Due Diligence (CDD)
Appropriateness assessments Client Categorisation
Risk Disclosures and communications to clients

If your firm offers clients Contracts for Differences (CFDs) including Spread Bets and Rolling Spot Forex and would like any assistance in reviewing your existing procedures please contact our experienced Compliance Consultants for a free no obligation chat.