On 1 December 2022, the FCA issued a Dear CEO letter regarding its contracts for difference (CFD) strategy.

In the letter the FCA reminds firms offering CFDs that CFDs are highly leveraged derivatives and adverse price movements in relevant markets can lead to substantial losses for consumers. The letter outlines the FCA’s expectations and highlights areas of poor practice which it has seen in firms. In terms of poor practice the FCA covers these under the following headings: (i) scam/churn activities (ii) circumvention of FCA rules (iii) affiliate marketers / introducers. The letter also covers putting customers’ needs first, including dealing with conflicts of interest and the new Consumer Duty, financial crime (including firms having due regard to Market Watch 69) and reducing harm from firm failure (financial resilience, protection of client assets, operational resilience).

In terms of the new Consumer Duty the specific areas that the FCA believes will be most relevant to CFD firms include:

  • The cross-cutting rules on acting in good faith – relevant but not limited to conflict of interest issues.
  • The rules on price and value – relevant to ensuring the target market for CFD products is appropriate, particularly given the high levels of customer losses generally experienced by consumers investing in CFDs.
  • The rules on customer service – this will be relevant to how consumers engage with CFD firms when investing in CFDs, including whether there is an appropriate degree of friction to ensure consumers do not put money at risk that they cannot afford to lose.
  • The rules on communications – relevant to how CFD firms advertise and market their products to consumers, including the negative impacts of gamification highlighted in recent work on behaviours around high-risk investing.

By the end-January 2023, the FCA expects all CEOs to have discussed the contents of the letter with their fellow directors and/or Board and to have agreed actions and/or next steps.