Following a review of the Contract for Difference (CFD) market, the Financial Conduct Authority (FCA) published a CEO letter sent to 34 CFD providers and brokers, asking them to improve their sales processes and oversight.
What was FCA’s focus
FCA looked at where firms offer CFDs to retail customers on either an advisory or discretionary portfolio management basis. The review assessed both the conduct of firms which provide the CFD service (the ‘providers’) and the organisations that distribute the product and deal with the end consumer (the ‘distributors’). This letter follows on from the FCA’s 2016 CEO letter on CFD’s highlighting their concerns with high risk products being sold to retail investors for speculative trading and often with a high level of leverage.
The FCA undertook the review to assess if firms are delivering CFD’s to the intended target market and paying due regard to the interests of customers and treating them fairly.
The results of the CFD review
The letter is very readable with Summary observations revealing that:
- Most providers and distributors were unable to offer a clear definition of their target market or to explain how they align the needs of this group to the CFD product they offered. For example, firms relied on broad investor descriptions such as ‘experienced’, ‘sophisticated’ and ‘financially literate’, without setting out what these terms meant in practice.
- 76% of retail customers who bought CFD products lost money between July 2015 to June 2016.
- Most of the communication, monitoring and oversight practices by providers over their distributors were ineffective and did not meet FCA expectations.
- Most CFD providers had flawed due diligence processes for taking on new distributors, with only one of 19 providers able to demonstrate a robust due diligence process.
- FCA identified weaknesses in the conflict of interest management arrangements as all the distributors we assessed.
- Most firms had MI and monitoring structures in place, however, flaws in these processes 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 MI or KPIs.
- The quality of remuneration arrangements at CFD distributors was mixed. While some demonstrated good practice, many firms had significant room for improvement. For example, some firms paid their staff on a commission only basis (what FCA calls a 100% variable basis). Clearly this raises the risk that staff may feel pressured to achieve minimum sales targets, regardless of whether this delivers good outcomes for customers.
FCA intend to take further action on one particular firm whose arrangements were identified as being very poor, whilst other firms have said they intend to stop providing CFDs to retail customers following FCAs feedback.
What is the FCA doing about it?
FCA is intending to continue monitoring the manufacture and distribution of CFD products and delivering good customer outcomes, as well as undertaking further work in this area and conducting follow-up reviews to access how firms have responded to their letter.