FCA signals intention to maintain pressure on CFD broking firms (again…)
Perhaps the most startling statement in the recent portfolio letter for Contract for Difference (CFD) providers, issued on 13th December 2024, is that of 100 CFD providers which entered the UKs post-Brexit temporary permissions regime (TPR), precisely zero were able to prove to the FCA that they were both willing and able to obtain permanent authorisation in the UK. It had long been the view of many in the compliance and regulatory community that some of the jurisdictions in which these firms were based applied a lighter touch approach, but now the difference in the level of scrutiny between the UK and certain EU jurisdictions is brought into sharp focus.
In theory this is good news for UK firms – in theory they will face reduced competition for UK clients from providers in the EU who they have long perceived as having a competitive advantage on the basis of their domicile (although some EU providers may still be marketing into the UK through ‘halo’ legal entities or the approver regime for financial promotions). However, this good news is significantly tempered by the FCAs clearly stated intention to maintain significant pressure on UK firms.
The portfolio letter sets out a number of key areas of focus for CFD providers over the coming months and years. Many of these will be familiar to those in the industry, as a continuation of long running themes. Nevertheless, there are a number of areas where compliance teams should consider updating policies, procedures and controls.
Consumer Duty – the Consumer Duty is a key area of focus for the FCA across all retail firms, and CFD providers are seen as a high priority cohort. In particular, the FCA expects CFD providers to consider whether their spreads and charges are fair, whether opt-ups to professional status are appropriate, and whether vulnerable clients are appropriately identified. Compliance teams should be particularly alert to the risk that vulnerable clients (e.g. those with addictive behaviour) are being elected up to riskier products, as we have seen cases where the high returns which can be generated from such clients can cloud the judgement of front office staff.
Market Abuse – the FCA has long been alert to the risk that CFD products, particularly those referencing single stocks, may be used to commit insider dealing. Most firms now have robust controls in place to identify such behaviours. However, in the portfolio letter the FCA particularly highlights the risks associated with Organised Criminal Gangs and Obfuscated Overseas Aggregated Accounts. Compliance teams should therefore review their market abuse risk assessments and controls, to determine whether these behaviours have been specifically captured in the risk assessment, and are addressed by appropriate surveillance.
Client assets – the FCA uses the portfolio letter to re-emphasises the importance of appropriate protection for client assets, following on from their Dear CEO letter of 2020. The FCA remains focussed on ensuring that firms are applying proper segregation to retail assets, and whether TTCA arrangements for professional clients are appropriate (linked with the appropriateness of opt-ups also addressed under consumer duty).
Distributors and Appointed Representatives (AR) – since 2018, the FCA has been conducting significant work on the appropriateness of distributor and AR arrangements. The FCA has indicated its intention to perform in-depth reviews of all distributor models in the CFD sector in the coming years, and also continue its work on ARs across all sectors. As such, firms with such arrangements should conduct their own work to ensure their robustness as soon as possible.
Extensions into new products and services – the FCA has noted a number of CFD providers seeking to extend their services into stocks and fractional shares, and targeting less experienced investors through apps. The FCA has flagged the different risk profile associated with these new services and client cohort, and signalled their intention to do further supervisory work in the sector on this trend
All firms should ensure that they have had appropriate internal discussions on the themes raised in the letter, and agreed a plan of action, by the end of January.
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