The FCA formed the view there is a high risk that CFD providers industry-wide are not meeting the requirements of the rules when taking on new clients or are failing to do enough to prevent financial crime. The FCA’s concern was such that they said “firms should examine their own processes”. Two key areas for concern by the FCA, and action by CFD firms, were:
- take-on procedures in the context of the authority’s conduct of business obligations, and
- systems and controls rules.
So the risk is recognised by the FCA and no doubt will become the focus of their attention in the coming months.
So what should firms offering CFDs do over the coming weeks to ensure they provide CFDs in a way that will address the FCA’s concerns?
Generally the problem is that onboarding, appropriateness and anti-money laundering systems and controls are established integral processes which can often be difficult to re-assess. However they must be kept under review to ensure they develop with regulatory changes and expectations.
The following summarises the actions firms should be taking to achieve the required standard and perhaps avoid some of the consequences that may well follow this review.
- Risk assessments These must be based on client specific information and not be reliant on a basic scoring system which does not take into account the true background, level of understanding and knowledge of each client.
- Risk assessment processes must be updated together with staff training to ensure focus is upon how to apply and interpret risk assessments to avoid reliance on self-certification.
- Ensure your approach demonstrates the extent to which you meet the requirements of Principle 7, in that your firm is paying due regard to the information needs of clients and communicating information in a way that is fair and not misleading.
- Assess whether appropriate action has been taken to ensure clients understand the risk. Are you assessing appropriateness in accordance with COBS? Does this result in a clear and adequate risk warning to clients? The FCA review identifies that firms must do more in this regard.
- Inevitably you will identify some high risk clients based on a range of circumstances. Two actions from the review are important in this context. Check to ensure your client onboarding takes into account all the appropriate circumstances of each client and, having done so, you applying enhanced due diligence to these high risk clients?
- Have you carried out a review to check the anti-money laundering controls for managing the increased risk posed by higher risk clients are sufficient and being applied consistently? Does your firm’s staff training and client records support this and do your records document it?
- Take this opportunity to revisit the records you establish during client onboarding. Ensure your client onboarding and subsequent treatment meets FCA Principle 6, in paying due regard to the interests of customers and that you are treating them fairly – a significant challenge in the CFD market.
For further information, or to discuss any of the points raised in this article in more detail, please contact Andrew Jacobs
from the Regulatory Consulting team.