The concerns chiefly relate to:
- Failure of firms to match CFDs to an appropriate target market. The FCA considers CFDs to be complex and high-risk. It demands that firms define an appropriate target market and match the CFD product to the market’s needs. The FCA discovered firms defined target markets poorly – based on nebulous descriptive criteria – resulting in an inability to select appropriate products according to market requirements.
- Retail customers losing money. The FCA found 76% of retail customers who bought CFD products lost money from July 2015 to June 2016.
- Providers failing to select and monitor distributors. Providers are required to rigorously select and oversee their chosen distributors on an ongoing basis, ensuring their distributors sufficiently understand the products so they can inform or advise their clients appropriately. The FCA noted widespread inadequacies in providers’ due diligence when engaging distributors, and ensuring their competence. The FCA further considered none of the firms it sampled were measuring up to its monitoring standards.
- Managing conflicts of interest. The FCA considered most firms’ measures in this area were lacking, and expressed concern that several firms failed to record a single instance of a conflict or even claimed there was no potential for conflicts in this area.
- Ineffective oversight of distribution channels. Providers are required to detect distribution patterns and evaluate whether products are reaching their target market. Distributors are also required to quantitatively oversee distribution. The FCA thought many firms did not use management information (MI) and KPIs effectively, entailing a lack of critical oversight over distribution channels and risking control failures going unrecognised.
- Client categorisation. The FCA considered many firms allowed clients to opt-up to ‘elective professional’ status too easily, depriving them of necessary regulatory protection.
- Remuneration arrangements. Poor practices that the FCA discovered included firms paying their staff entirely according to the revenue they generated (pressurising sales irrespective of customer outcomes) and a lack of documented remuneration policies.
Next steps
The FCA have indicated they intend to take further action against one CFD provider as a result of the review, and it seems likely ESMA or the FCA will take action across the sector on this topic in 2018. Firms involved in the provision and distribution of CFDs should scrutinise their procedures as soon as possible, particularly given the tightening of the regulatory environment made under MiFID II including on product governance, inducements, conflicts and remuneration.
For more information on CFDs, and the FCA’s and ESMA’s regulatory stance on the topic, the FCA webpage can be found here.
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