In a ‘Dear CEO’ letter issued this month, the FCA has expressed concerns following a review of 10 firms offering contracts for difference (CFD) products. The review identified several areas of concern that the FCA wished to highlight to firms across the industry offering CFDs and warned them to do more to ensure that customers know the risks they are taking with these products. Full details can be found here
The FCA’s concern was such that they said “firms should examine their own processes”. With the ensuing regulatory focus we detail what firms should be doing over the coming weeks to ensure they address the FCA’s concerns:
Client specific risk assessments –
ensure these are based on client specific information and not too reliant on a basic scoring system which does not take into account the true background, level of understanding and knowledge of each client.
Staff training –
update your risk assessment processes together with staff training to ensure focus is upon how to apply and interpret risk assessments to avoid reliance on self-certification.
Principle 7 –
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.
Ensure clients understanding of the risks –
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.
High risk clients –
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 apply enhanced due diligence to these high risk clients.
Anti-money laundering –
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?
Treating customers fairly –
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.
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