The FCA has published a Dear CEO letter following a recent review of the procedures for taking on new clients in a sample of ten firms that offer contract for difference (CFD) products. The firms sampled offer CFD products to clients on a non-advised basis.
The FCA identified several areas of concern which it has highlighted in the Dear CEO letter. It saw:
- a range of approaches to completing the appropriateness assessment, most of which were not in line with COBS 10. For example, the FCA found in many firms in its sample that they did not take into account the nature, volume and/or frequency of the client’s previous transactional experience or the time period over which such transactions had been carried out (COBS 10.2.2R). Also, some firms used a scoring system that gave too much weight to a number of other less relevant factors (for example age, length of time at address), so that the client’s relevant knowledge and experience no longer determined the outcome of the appropriateness assessment (COBS 10.2.1R(2));
- evidence of poorly worded risk warnings that did not set out the nature and risks of CFD products in a manner that was clear, fair and not misleading (COBS 4.2.1R and 10.3.1R); and
- evidence that some firms in the sample did not have anti-money laundering (AML) systems and controls in place which were proportionate to the nature, scale and complexity of their activities. In particular, it found that: (i) although firms were conducting adequate customer due diligence on standard risk clients, predominantly through the use of electronic identification systems, many were not conducting enhanced due diligence on clients identified as high risk; and (ii) client AML risk assessments did not often consider a range of factors and instead focused on jurisdictional risk, limiting their effectiveness.
The FCA also assessed the sampled firms’ approaches to categorising clients. The FCA had been concerned that firms offering CFD products might be incorrectly categorising clients as “professional”. However, the FCA is encouraged to see that eight of the ten firms that were assessed had classified all of their clients as ‘retail’, giving them the highest level of protection.
The FCA states that firms that offer CFD products should consider the points raised in the Dear CEO letter and that when reviewing their client take on processes they identify any areas of concern. The FCA states that it expects firms to have regard to Principle 6 (Customers’ interests) as well as Principle 11 (Relations with regulators) and act accordingly.
View Client take-on review in firms offering contract for difference (CFD) products, 2 February 2016