Regulation Tomorrow

FCA Dear CEO letter to providers and distributors of CFDs

The FCA has published a Dear CEO letter to providers and distributors of contracts for difference (CFDs) products. The Dear CEO letter follows a recent FCA review of the CFD market where it uncovered areas of serious concern.

The FCA’s review assessed 19 firms that provide CFDs to intermediaries which in turn distribute this product to retail consumers on either an advisory or discretionary basis. The FCA also evaluated 15 firms that distribute CFDs on these bases to retail investors.

In summary the FCA observations are:

  • most providers and distributors in the FCA’s 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;
  • the majority of retail customers who brought CFD products on either an advisory or discretionary basis lost money over the 12 month period under review (July 2015 to June 2016);
  • there were a wide range of communication, monitoring and challenge practices by providers over their distributors, many of which were ineffective and did not meet the FCA’s expectations;
  • most providers in the FCA’s review had flawed due diligence processes for taking on new distributors;
  • all distributors in the FCA’s review had weaknesses in their conflict of interest management arrangements;
  • whilst most firms had management information and monitoring structures in place, flaws in these tools meant that firms did not have the effective oversight they needed to robustly challenge poor conduct or control failings;
  • the quality of remuneration arrangements at distributors was mixed, many had significant room for improvement; and
  • several distributors had problems with their processes and the criteria they consider acceptable when categorising clients as elective professionals.

Overall, the FCA observes that the findings suggest that CFD providers and distributors may be failing to conduct their activities in accordance with the Principles for Businesses, the Client’s best interests rule (COBS 2.1.1R) and the Senior Management Arrangements, Systems and Controls sourcebook.

Firms should consider the Dear CEO letter and consider whether they comply with the FCA’s requirements for providing and distributing CFD products and take into consideration relevant guidance.

The FCA states that the provision and distribution of CFD products and delivering good customer outcomes in this sector will remain an area of focus. The regulator will undertake further work in this area and may ask firms to take part in a follow up review to assess how they have responded to the Dear CEO letter. Where the FCA identifies breaches to its rules, it will take appropriate action, including appointing investigators to examine specific firms, individuals or practices.

The FCA also draws firms’ attention to its new Product Intervention and Product Governance sourcebook (PROD). PROD implements the MiFID II product governance requirements into the FCA Handbook as rules for firms who manufacture and/or distribute financial instruments. When the FCA follows up on this topic in the future, it will also assess firms’ arrangements against these new provisions.

View FCA web page – contracts for difference, 9 January 2018

Original Article Here

Leave a Reply

Your email address will not be published. Required fields are marked *