FCA Highlights Concerns About Problem Firms In The CFD Sector

Dec 5, 2022 10:50:47 AM

What has happened?

On 1^st December 2022, the FCA issued a Dear CEO letter to CFD providers outlining its expectations and highlighting areas of poor practice seen in firms. The FCA expects all CFD firms to have agreed their actions and next steps in response to these concerns, where they apply, by the end of January 2023 and in advance of the Consumer Duty regulation coming into force in July 2023.

What are the key points of the letter?

Approximately 80% of customers lose money when investing in CFDs and, because of the risks, the FCA has undertaken an extensive programme of work to ensure consumers are as protected as possible. The sector has attracted a number of firms, often accessing the UK from overseas, that do not deliver good customer outcomes. In 2020 and 2021, FCA action stopped 24 firms from marketing CFDs in the UK. Further FCA action has been taken in 2022 and the FCA has confirmed that this action will continue where it is justified.

Key features identified in problem firms are;

the use of fake celebrity endorsements,
the use of unregulated affiliates, sometimes posing as social media influencers, as introducers,
the use of pressure sales tactics to persuade customers to invest increasing amounts of money, which may be borrowed,
inherent conflicts of interest in the business model,
the use of compensation or settlement agreements, typically involving the client having to sign a non-disclosure agreement to receive substantially lower compensation than the client’s investment loss,
excessive fees and refusal to process withdrawals,
inducements given to customers to upgrade to elective professional status despite their not meeting the criteria and losing protection under FCA rules, or redirecting retail customers to associated CFD providers incorporated in third country jurisdictions without equivalent consumer protections, and
giving investment advice without authorisation,
market abuse and high numbers of Suspicious Activity Reports,
weaknesses in controls over client assets, and
lack of financial resilience

The FCA also points out that at its regulatory gateway, it has an enhanced risk appetite for all applications in this sector, including for new authorisations, changes in control, and senior managers.

The specific areas of the Consumer Duty regulation likely to be most relevant to CFD firms include:

the cross-cutting rules on acting in good faith,
the rules on price and value – relevant to ensuring the target market for CFD products is appropriate, particularly given the high levels of customer losses generally experienced by consumers investing in CFDs,
the rules on customer service – this will be relevant to how consumers engage with firms when investing in CFDs, including whether there is an appropriate degree of friction to ensure consumers do not put money at risk that they cannot afford to lose, and
the rules on communications – relevant to how firms advertise and market products to consumers, including the negative impacts of gamification highlighted in the FCA’s recent work on behaviours around high-risk investing. Read the article here.

How can we help you?

If you’d like to know more about how we can help you with your CFD product, Consumer Duty regulation, trading app or IFPR arrangements, or any other regulatory compliance issues, our specialist team is here to help.

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