The FCA has published a Dear CEO letter addressed to CFD providers, following its review of CFD market, calling for significant improvement in oversight and control arrangements, for firms involved in CFD distribution. The FCA wants to ensure that CFD providers manufacture and distribute CFD products to the intended target market; and pay due regard to the interests of customers and treat them fairly. The FCA confirms that, following its feedback to firms, several providers have indicated that they will not be providing CFDs to firms distributing CFDs on an advisory or discretionary basis. The FCA also states that it intends to take further action against a CFD provider whose arrangements have been identified as especially poor.
The FCA's review assessed both the conduct of firms which provide CFD trading services and the organisations that distribute the product and deal with the end consumer. The FCA states that the review exposed areas of serious concerns covering: target market identification; communication, oversight and challenge; the process for taking on new distributors; managing conflicts of interest; the use of management information and key performance indicators; and client categorisation. According to the FCA, its findings suggest failure on the part of CFD providers and distributors to observe the FCA Principles for Business, the client's best interests rules (COBS 2.1.1R) and SYSC when conducting their activities. Clearly, there is also now an overlay relating to MiFID II and PRIIPs (in relation to target market, appropriateness, inducements (conflicts) and product governance).
key findings
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• Poor target market understanding. Most providers and distributors in the review were unable to offer a satisfactory definition of their target market or to explain how they align the needs of this group to the CFD product they offered.
• Risk. Given the level of risk of CFD products, it is important firms comply with FCA rules; the majority (76 per cent) of retail customers who bought CFD products on either an advisory or discretionary basis lost money over the 12 month period under review.
• Monitoring of distribution. The FCA saw a wide range of communication, monitoring and challenge practices by providers over their distributors, many of which were ineffective and did not meet its expectations.
• Conflicts. The FCA identified weaknesses in the conflict of interest management arrangements of all the distributors assessed in the review.
• Effective management information. Despite the fact that most firms had management information and monitoring structures in place, flaws in these tools meant firms did not have the effective oversight they needed to robustly challenge poor conduct or control failings. Some firms were unable to offer any evidence of management information or key performance indicators.
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