Recently, the FCA published Market Watch 73 which covered the regulator’s market abuse peer review into firms that offer contracts for difference (CfDs) and spread bets. The Market Watch followed the FCA’s earlier Dear CEO letter which was published last December which highlighted the FCA’s expectations of firms offering CfDs (including in relation to the new Consumer Duty) and illustrated areas of poor practice.

The key issues identified in the FCA’s Market Watch raise important questions that firms offering CfDs and spread bets should consider and provide some useful reminders of FCA expectations and best practice:

  • Market abuse risks – Not all firms could demonstrate they had considered all market abuse risks relevant to their business. Firms which had considered the entire business, all asset classes and different execution methods were more effective in identifying applicable risks.
  • Market abuse surveillance – Most firms do not have effective surveillance for non-equity asset classes, and a range of different set ups are used. Where responsibility for market abuse surveillance rests with teams or individuals outside compliance, the FCA found more effective arrangements where conflicts had been considered and mitigated through independent oversight and quality assurance.
  • Surveillance systems – Some firms do not monitor for unrealized profits, either specifically, or by capturing them via discrete alerts, such as news or price movements, which operate independently of profit. The FCA states that the firm which reviews all trading activity prior to an event, rather than limiting investigation to the alerted trading, will be more effective at identifying potential market abuse which falls outside the system parameters. The regulator adds that firms should consider whether their surveillance coverage is adequate for market manipulation and in non-equity asset classes.
  • Narrowing the spread – The FCA believes that this type of market manipulation may be increasing but no firm in its survey had listed this behaviour in their risk assessments or had compliance-based surveillance to detect it. Firms providing DMA access to clients should also be aware of potentially unusual activity where clients are improving the best bid or offer and rarely executing those orders, as a potential indicator of narrowing the spread.
  • Front office and tipping off – Compliance being reluctant to provide feedback to front office staff on surveillance matters or refuse client orders due to concern about tipping off. A balance is needed in terms of engaging with front office on surveillance matters.  Although STORs should only be shared on a need to know basis, this should not prevent Compliance educating the front office where concerns have not been raised.  Where front office holds information which leads them to conclude that a client is seeking to trade either manipulatively or based on inside information, they should refuse to accept that order, where they are able to do so. Relevant compliance policies should be clear and appropriate action taken if they are breached. Guidance on this is set out in the FCA’s Financial Crime Guide, 8.2.3.
  • Countering the risk of market abuse-related Financial Crime (SYSC 6.1.1R) – A robust framework, which includes how to deal with new clients, will be particularly useful to firms in the CfD sector. Keeping good records of discussions about clients and decisions about whether to retain, restrict or offboard clients is also important. It enables firms to demonstrate they are meeting their obligations to counter the risk they are being used to facilitate market abuse.

The FCA asks CfD providers to consider the points made in Market Watch and take steps to ensure that their systems and procedures for detecting and reporting potential market abuse are appropriate and proportionate to the scale, size and nature of their business activities. The regulator adds that firms should also ensure they have effective policies and procedures to counter the risk they are used to further market abuse-related financial crime as per SYSC 6.1.1R.

In their enforcement proceedings the FCA often allude to Market Watch and Dear CEO letters as providing fair warning to firms of their expectations so the failings identified should be taken seriously and careful records made of steps taken to review policies and procedures and address any potential areas of challenge. There has also been previous FCA enforcement in this area, see for instance FCA v Barnett Michael Alexander (2011) and FCA v Corrada Abbattista (2022). The FCA adds in Market Watch that it will continue to visit CfD providers to assess their Suspicious Transaction and Order Reports arrangements and work to ensure they meet their regulatory obligations.