On January 10, the UK Financial Conduct Authority (FCA) published a “Dear CEO” letter that it has sent to providers and distributors of contract for difference (CFD) products to retail customers.
The letter reminds firms that CFDs are high-risk, complex financial products and refers to the FCA’s recent review of the CFD market. During the review, the FCA assessed the conduct of firms providing the CFD service and firms that distribute the product and deal with the retail customer.
The review uncovered a number of areas of concern regarding the following:
- target market identification and aligning this group to the characteristics of the product;
- communication, oversight and challenge on the part of providers dealing with distributors;
- providers’ process for taking on new distributors;
- distributors’ management of conflicts of interest;
- providers’ and distributors’ use of management information and key performance indicators;
- client categorization by distributors; and
- remuneration arrangements within distributors.
Given what the FCA considers are “significant weaknesses” across the sample of firms assessed for the review, the FCA believes that there is a high risk that firms across the sector are not meeting its rules and expectations when providing and distributing CFDs. As a result, the FCA states that consumers may be at serious risk of harm from poor practices.
The FCA goes on to state that firms must consider the issues raised and whether they comply with the FCA’s requirements when providing or distributing CFDs to retail customers on an advisory or discretionary basis. In particular, the FCA thinks that firms need to improve a number of oversight and control arrangements to reach the standards that the FCA would consider adequate.
The FCA advises firms to pay specific attention to the FCA’s new Product Intervention and Product Governance sourcebook (PROD), which implements the product governance requirements of the revised Markets in Financial Instruments Directive (MiFID II). When the FCA follows up on CFD provision and distribution in the future, it will assess firms’ arrangements against PROD.
The letter is available here.