Letter sent to firms by UK financial regulator the FCA highlights concerns with CFD products

The FCA has been looking into products and services offered to retail investors and part of their focus has been on CFD products. Today they’ve issued a statement via a copy of a letter that will be sent to firms. In it they highlight concerns they have;

  • Most providers and distributors in our review were unable to offer a satisfactory definition of their target market or to explain how they align the needs of this group to the CFD product they offered.
  • Given the level of risk of these products, it is important firms comply with our rules. We note that the majority (76%) of retail customers who bought CFD products on either an advisory or discretionary basis lost money over the 12 month period under review (July 2015 to June 2016).
  • We saw a wide range of communication, monitoring and challenge practices by providers over their distributors, many of which were ineffective and did not meet our expectations.
  • Most sample providers had flawed due diligence processes for taking on new distributors.
  • We identified weaknesses in the conflict of interest management arrangements at all the distributors we assessed.
  • Most firms had MI and monitoring structures in place. However, flaws in these tools meant firms did not have the effective oversight they needed to robustly challenge poor conduct or control failings. Some firms were unable to offer any evidence of MI or KPIs.
  • The quality of remuneration arrangements at CFD distributors was mixed. While some demonstrated good practice, many firms had significant room for improvement.
  • Several distributor firms had problems with their processes and the criteria they consider acceptable when categorising clients as elective professionals
In our view, none of the 19 providers in our review were acting in line with our guidance(RPPD). Additionally, these firms could not demonstrate that they were acting with due skill, care and diligence. As a result, they risk non-compliance with Principle 2 (Skill, care and diligence). We were particularly concerned with providers’ lack of effective communication and challenge, given that the majority of retail investors (76%) lost money over the period we reviewed.
Next steps
Given the significant weaknesses we found across our sample, we believe there is a high risk that firms across the sector are not meeting our rules and expectations when providing and distributing CFDs. As a result, consumers may be at serious risk of harm from poor practices in this sector
It should be remembered that the definition of a CFD has been broadened to what was a specific trading vehicle where investors could short stocks. The function is now used to cover many markets as a way for retail brokers to offer their own parallel markets, for example, in things like FX. The long and short of this statement is that firms need to get their acts together and the biggest message that could affect us as traders, is the way we need to be classified. Unless we accept and sign terms that we are knowledgeable in investments and therefore possibly classed as professional investors, we may find that we’re restricted from trading many markets and products.
You can read the full statement/letter here. FCA CFD review findings 10 01 2018
Ryan Littlestone

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