Response to FCA Letters – Contracts for Difference Strategy

In its First Portfolio Letter to CFD providers, both small and large, published on 1 December 2022, the FCA outlined its ongoing concerns with some high-risk derivative products especially in the context of the FCA’s consumer protection objective. In particular, the FCA highlighted three core, often concurrent, poor behaviours: (1) scam/churn activities used by firms in the Temporary Permissions Regime; (2) circumvention of the FCA rules by doing things like inappropriately opting up retail consumers to elective professional status or redirecting retail customers to associated CFD providers in other jurisdictions without equivalent consumer protections; and (3) the use by firms of unauthorised affiliate marketers/introducers where their oversight of such affiliates is inadequate and often part of a deliberate, exploitative strategy.

The FCA highlighted the specific areas of the Duty which firms needed to address and stated that it expects all CEOs to have discussed the letter with their fellow directors and/or Board and to have agreed actions and/or next steps.

The FCA published another portfolio letter on 6 April 2023 (dated 31 March 2023) which set out useful reminders in relation to applicability of the Consumer Duty and the key implementation dates.

The letter also sets out the following:

• Feedback from FCA’s recent review of firms’ implementation plans – the FCA highlights that (i) firms need to focus on effective prioritisation for the implementation work, aiming at reducing risk of poor outcomes; (ii) firms should ensure that existing policies and processes are adequate and (iii) ensure efficient information sharing with other firms.

• The FCA’s approach to supervising the Duty in CFD firms and planned next steps – the FCA has stated that it has started looking at the adequacy of CFD firms’ implementation plans for
  embedding the Duty and we will continue to focus on this as a priority.

Annex 1 – How the Duty applies to payments firms

Whilst this information is a helpful summary, it does not impose new requirements. However, the FCA has stressed that CFD firms encouraging customers to seek ‘professional client’ classification simply to circumvent the consumer protections afforded to retail will be in breach of the Duty.

Distribution chain

Annex 1 also includes a reminder that all firms in the distribution chain for a product of service that will reach a retail customer are subject to the Duty. CFD firms are reminded that they can be manufacturers of products and services.

The letter states that the FCA would expect that firms that act as principal to appointed representatives must be able to demonstrate an appropriate degree of oversight for their products or services. CFD firms are expected to also review their distribution channels and whilst the FCA has confirmed that firms are not responsible for the activities of independent firms, CFD firms would need to take reasonable steps to ensure their distribution strategy remains appropriate.

Annex 2 – Key things for CFD firms to consider

This Annex looks at each of the four outcomes and it reminds CFD firms that apart from being required to calculate the percentage of customers that lose money when trading CFDs, CFD firms must also comply with all cross-cutting rules.

1. Governance of products and services – Firms should review their governance processes if they act as a manufacturer and their distribution arrangements, especially around conflicts of interest where they act as distributors. Firms are reminded that they need to ensure that the target market is suitable for CFD products – and be especially vigilant in relation to vulnerable customers due to the addictive nature of some CFD products.

   The FCA has stressed that they expect proper review and monitoring to be implemented and that they are prepared to take action where they identify poor behaviour.

2. Price and Value – The FCA has stressed the importance of considering whether their charges are fair, transparent and measurable. Manufacturers in the CFD field must consider the expected total cost and distributors must consider the distribution arrangements and their value. Ancillary charges (eg overnight holding charges, commissions, account dormancy charges) need to be considered as well.

3. Consumer understanding and communications – CFD firms should fully review all of their consumer interactions – they should consider how they advertise and market products to consumers. The FCA has stressed that the high-risk nature of CFDs means they need to be appropriately reviewed to ensure that the way they are marketed/communicated is appropriate for the target audience. The FCA has reminded firms that they need to ensure that their communications meet the information needs of their customers – while manufacturer firms are not responsible for the activities of their third-party distributors, they must take all reasonable steps to ensure their products are distributed to the identified target market. The FCA has reminded firms that they have previously identified problems with the way CFDs are sold by third-party distributors – FCA considers that this needs to be addressed under the Duty.

4. Consumer support and service – The FCA has reminded firms that it is imperative to ensure that consumers do not face unreasonable barriers – eg consumers should be able to easily close positions and accounts, make fund withdrawals etc. The high-risk nature of CFD products might lead to increased consumer dissatisfaction and as such CFD firms should consider all levels of customer interactions – focus should be placed on customers with characteristics of vulnerability.