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FCA advises of regulatory finding from CFD & Spread Betting Firm review

2nd February 2016

The Financial Conduct Authority today issued Dear CEO letters to those firms offering Contracts for Differences (CFDs) to clients, including Spread Betting Providers and those offering Rolling Spot FX. CEO’s of CFD firms must now review their firm’s practices to ensure they are compliant with regulatory requirements.

Client On-boarding (Client Take-on)

The topic of the Dear CEO letter to CFD Firms was largely with regards to firms’ client take-on procedures, how firms conduct their business and which systems and controls are in place.

Ten CFD firms within the industry were reviewed, with the regulator finding that many of these firms had procedures they considered inadequate to comply with their regulations.

Regulator’s Areas of Concern in relation to CFD Firms:

Most notably, the FCA found that in on-boarding clients, firms:

The result of these findings suggest that some CFD firms may not be treating their clients fairly or acting in their clients’ best interests, thus breaching compliance with the FCA’s Principles for Business and their Conduct of Business rules.

In addition, due to the concern over firms’ AML systems and controls, the FCA feels that firms may be failing to do enough to prevent financial crime.

Inadequate Appropriateness Assessments

It was noted from the regulator’s letter that they consider CFDs to be ‘complex’ since these leveraged products “can put clients at risk of losing more than their original investment.”

As such, much emphasis of the Dear CEO letter was placed upon whether firms are doing enough to assess whether CFDs are appropriate for their clients and in particular that firms should be:

What should CFD Firms do now?

The ‘Next Steps’ as advised by the regulator is for CEOs to review their firms’ processes in relation to the FCA’s areas of concern as firms need to ensure they fully comply with their regulatory requirements when offering non advised, execution only sales of CFDs.

CFD Firms to Review Client On-boarding following Dear CEO Letter

Contracts for Difference

(FCA Glossary  Extract 02Feb16)

contract for differences:

the investment, specified in article 85 of the Regulated Activities Order (Contracts for differences etc), which is in summary ights under:

i. (a) a contract for differences; or

ii. (b) any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in:

(i) the value or price of property of any description; or

(ii) an index or other factor designated for that purpose in the contract; or

iii. (c) a derivative instrument for the transfer of credit risk to which article 85(3) of the Regulated Activities Order applies.

Relevant Resources:

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Client Take-on Support Services for CFD Firms

If your firm offers CFDs, Spread Bets or Rolling Spot FX to clients and would like help in reviewing your client on-boarding procedures or if you require any other regulatory compliance support, please contact our experienced Compliance Consultants for a free no obligation chat.

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CFD Client On-Boarding Review Support

Our compliance consultants are specialists in the financial markets, offering a good understanding of the commercial as well as the regulatory aspects of Derivatives Brokers including Forex, CFD and Spread Betting providers amongst others.

Our Regulatory professionals can assist with any regulatory requirement you may face and can assist with:

Anti-money laundering procedures and controls         Appropriateness assessments

Client on-boarding procedures                                  Client Due diligence

Appropriateness assessments                                    Client Categorisation

Risk Disclosures and communications to clients

If your firm offers clients Contracts for Differences (CFDs) including Spread Bets and Rolling Spot Forex and would like any assistance in reviewing your existing procedures please contact our experienced Compliance Consultants for a free no obligation chat.