| UK & Europe | Articles
The FCA’s patience appears to be wearing thin when it comes to CFD firms, with its recent CEO letter threating “swift and assertive action” where it identifies harm. CFD providers should act now to avoid being next in line for enforcement and others should take heed of the themes included.
The FCA issued the Dear CEO Letter to CFD providers earlier this month, highlighting continuing concerns of poor behaviour in the sector. The industry has been put on notice over the last few years through numerous reviews, letters and fines. However, it seems the message is still not getting through. In its wide-ranging missive, published 1 December 2022, the FCA once again lays down its expectations, warning that it will take action where necessary. CEOs and their fellow directors are expected to have discussed this letter, and, where applicable, to have agreed actions or next steps by the end of January. The FCA makes clear that Board and/or Executive Committees should be prepared for their response to this letter to be scrutinised.
Behaviours of concern
The FCA calls out the following poor behaviours seen to cause significant harm to consumers:
- Scam/churn activities: including techniques such as fake celebrity endorsements and/or content designed to attract consumers to a ‘rising market’ for a relatively small sum and using pressure-sales tactics to persuade customers to invest increasing amounts of money – often to avoid realising open losses.
- Circumvention of FCA Rules: inappropriately ‘opting-up’ retail consumers to ‘elective professional’ status, causing consumers to lose regulatory protections – in particular, leverage restrictions designed to minimise client losses.
- Affiliate marketers/introducers: using unauthorised affiliates to introduce clients, including social media ‘influencers’ who target younger consumers with lower levels of financial literacy for whom CFDs are inappropriate. Some affiliates market themselves as FX ‘educators’ and ‘signals providers.’
What CFD firms need to do
Putting customers’ needs first and managing conflicts of interest
All firms are expected to have analysed all relevant conflicts of interest inherent in their business model and to comply with all relevant FCA rules. This is of paramount importance given firms’ obligations under the Consumer Duty that will be coming into force in 2023.
Delivery of ‘assertive actions’ on market abuse
The FCA remains concerned at the level of suspicious transaction activity in the CFD sector and the weakness of some firms’ controls. Firms are expected to comply with, and to consider, all relevant FCA Rules and Guidance respectively and to have due regard to the recently published Market Watch 69. Where standards fall short of expectation firms can expect the FCA to take swift and assertive action, as demonstrated most recently by the £530000 fine for Sigma Broking and its directors.
Financial resilience
All firms should have implemented the Investment Firms Prudential Regime (IFPR), which came into force on 1 January 2022. Firms’ boards should test the adequacy of their firm’s IFPR implementation, including their internal capital adequacy and risk assessments (ICARA), as well as their recovery and wind-down plans.
Protection of client assets
Firms are expected to identify and address any weaknesses in their client money and asset framework, be it enhancing the governance and oversight, investing in systems or updating their overall knowledge of the client asset regime.
Operational resilience
As CFD firms’ business models are often highly dependent on stable and resilient IT platforms and are especially vulnerable to operational weaknesses such as cyberattacks and customer volume spikes, firms are expected to ensure operational resilience, in order to minimise preventable harm to consumers and markets.
We can help
We regularly work with firms to ensure their governance arrangements and compliance framework are up to speed.
Our team of regulatory experts can help you understand and align your business to regulatory expectations, whether it is an assessment of conflicts of interest, market abuse risk, IFPR or Consumer Duty implementation, or enhancement of your client assets framework. We are also experts in FCA applications and can support with changes of control, variations of permission, full authorisation and coaching for senior managers facing FCA interviews.
Get in touch
