Following a review of new client take-on procedures in a sample of ten firms that offered contract for difference (“CFD”) products, the FCA has published a ‘Dear CEO’ letter.
We are reminded that, under the Handbook Glossary, the term ‘CFD’ also captures spread bets and can also include rolling-spot forex contracts.
As a result of the review the FCA has concerns over the adequacy of take-on procedures and expects all relevant firms to review their own procedures to ensure that they meet Handbook requirements.
Areas of concern highlighted in the letter include:
- Inadequate ‘appropriateness’ assessments (COBS 10).
- Inadequate risk warnings issued to those clients that failed the appropriateness assessment (COBS 10.3 and COBS 4.2).
- Insufficient AML systems and controls (SYSC 6.3).
The FCA was also concerned about the incorrect categorisation of clients as ‘professional clients’. However, the FCA was ‘encouraged’ to find that eight of the ten firms classified all of their clients as ‘retail’, so providing them with the highest level of protection.
The Annex to the letter includes useful Handbook rule references as well as a link to the 2013 ESMA (and EBA) ‘Investor Warning’.
Firms offering CFD products should review their processes in the light of the FCA concerns expressed in the ‘Dear CEO’ letter, addressing any inadequacies. With this mind, the ESMA Briefing Report published in 2012 on ‘Appropriateness and execution-only’ may assist with ensuring that appropriateness assessments are in accordance with regulatory expectations. Where a firm employs the use a series of questions for this purpose then there should be a process in place which allows the firm to determine whether a product is indeed appropriate for a particular client based on those responses. Although there is nothing in the letter to suggest that there may be a ‘FCA follow-up’, given that the findings suggest that most ‘CFD product’ clients are ‘retail’ and the serious issues raised, it is always a possibility.