On February 2, the Financial Conduct Authority (FCA) published a “Dear CEO” letter (Letter) setting out the FCA’s findings from a review of client take-on procedures for firms that offer contract for difference (CFD) products to clients.
The FCA reviewed a sample of 10 firms that offer CFDs on a non-advised basis. The review considered: (1) approaches to assessing the appropriateness of CFDs for clients; (2) initial disclosures given to clients; (3) anti-money laundering (AML) systems and controls in place; and (4) approaches to categorizing clients.
The aim of the review was to assess the areas above against the requirements of the FCA’s Conduct of Business sourcebook (COBS) and Senior Management Arrangements, Systems and Controls sourcebook (SYSC).
The Letter reports that the FCA found several areas of concern. The FCA found that most firms were not assessing the appropriateness of CFDs for clients in line with chapter 10 of COBS. Firms were found to issue “poorly worded risk warnings” and in some cases, were unable to assess the appropriateness of CFDs for clients. The FCA was concerned with firms asking clients to “self-certify” they understood the risks of a CFD, as opposed to actually assessing the appropriateness of CFDs for clients. In addition, AML systems and controls in place were found to be inadequate, particularly for clients identified as high risk. When conducting AML risk assessments, firms were also found to focus on jurisdictional risk, as opposed to considering a range of factors.
However, the FCA notes in its Letter that in terms of client classification, the FCA was heartened that eight of the 10 firms had classified “all of their clients” as retail, to give them “the highest level of protection.”
The FCA is concerned that CFD providers, on an industry-wide basis, are not meeting the FCA’s requirements in relation to taking on new clients and or preventing financial crime. Firms are expected to ensure they are complying with the FCA’s requirements in relation to CFD products, and to amend their policies and procedures accordingly so as to comply with SYSC and COBS requirements.
A copy of the FCA’s Letter can be found here.