In a ‘Dear CEO’ letter, the regulator said that a review of 10 firms that provide CFD products to clients on a non-advised basis had revealed a range of approaches to completing an assessment of the appropriateness of the products, most of which were not in line with the regulations.
It also found that most risk warnings issued to clients who failed the appropriateness assessments were not adequate, while anti-money laundering controls in place to manage the increased risks posed by higher risk clients were insufficient.
These findings, the FCA said, “suggest that firms may not be acting in the best interests of their clients and treating them fairly, bringing into question firms’ compliance with the Conduct of Business Sourcebook (2.1.1R) and the Principles of business.
The largest areas of concern from the sample of companies were: the gathering of insufficient detail as to what the client was familiar with; insufficient awareness of the nature, volume and/or frequency of previous transactional experience; an inadequate scoring system and an over-reliance on self-certification.
The FCA said it also found evidence of poorly worded risk warnings.
“Many firms had not established a process to assess whether clients who fail the appropriateness assessment (and who have received a risk warning letter), but who nonetheless wish to trade in CFDs, should be allowed to proceed with CFD transactions,” it added.
The level of anti-money laundering measures was also considered insufficient in most cases.
The regulator assessed firms’ approaches to categorising clients.
In this regard, while it said it had been concerned that firms offering CFD products might have been incorrectly categorising clients as ‘professional’, it said it was “encouraged to see that eight of the ten firms that we assessed had classified all of their clients as ‘retail’, giving them the highest level of protection”.
As a result of the review, the FCA is concerned that CFD providers industry-wide “are not meeting the requirements of the rules when taking on new clients and/or are failing to do enough to prevent financial crime.
