In a ‘Dear CEO’ letter issued this week, the FCA expressed concerns following a review of ten firms offering Contracts for Difference (CFDs).
The key focus of the review was to assess client take-on procedures against the requirements of the COBS and SYSC, rules with particular reference to the following areas:
- the firms’ approach to assessing the appropriateness of CFD trading for prospective clients;
- initial disclosures to clients;
- anti-money laundering (AML) controls;
- client categorisation.
The FCA found that firms were not adequately assessing the appropriateness for clients, with many too readily accepting of the customer’s self-certification. It was also found that many firms failed to provide adequate risk warnings as to the nature of the firms’ products.
Undertaking customer due diligence on standard risk clients was found to be predominantly through the use of electronic identification systems; many firms were not, however, conducting enhanced due diligence on clients identified as high risk. Also, it was found that client AML risk assessments often did not consider all appropriate factors, and instead tended to focus on jurisdictional risk, limiting their effectiveness in providing a secure assessment of the risk presented on a client-by-client basis.
In commenting on the results of the review, the FCA stated that it identified several areas of concern which it wished to highlight to firms across the industry and stated that: “Given the poor results that we observed across our sample, we are concerned that there is a high risk that CFD providers industry-wide are not meeting the requirements of the rules when taking on new clients and/or are failing to do enough to prevent financial crime.” They went on to warn that firms offering CFDs to do more to ensure that customers know the risks they are taking with these products.
With some clear messages and regulatory focus on those firms offering CFDs, we suggest that firms respond positively to the direction from the FCA and review the extent to which their existing client on-boarding practises comply with FCA requirements for sales of CFD products.
At Moore Stephens, we have had a number of recent conversations with the regulator regarding their expectation in this area, so can support you in determining whether your policies and procedures are up to regulatory standards.
Our award-winning Regulatory Consultancy team helps businesses anticipate and adapt in an ever changing regulatory climate and we can provide consultative problem-solving together with core compliance services to meet all of your regulatory needs.
To discuss how this latest communication from the FCA affect you, or to discuss any other regulatory areas that are important to you and your business, please contact Andrew Jacobs