The FCA has prevented four Cypriot investment firms from continuing to offer high risk Contracts for Difference (CFDs) to UK investors by removing their passporting rights. This is the first example of the FCA using its power to remove passporting rights from a firm. The FCA found, amongst other things, that the firms had failed to pay money owed to investors, charged customers undisclosed fees and failed to tell them about the risks of trading CFDs.
On 1 June 2020, the FCA published four First Supervisory Notices (dated 28 May 2020) in respect of F1Markets Ltd., Hoch Capital Ltd., Magnum FX (Cyprus) Ltd. and Rodeler Ltd.
All four firms provided UK clients with the ability to trade CFDs through online platforms and had permission to do so under MiFiD. The firms were required by MiFiD to assess the compatibility of financial instruments against the needs and best interests of their clients and to ensure that their marketing material was clear, fair and not misleading.
The FCA found that as part of their marketing the firms used the endorsement of celebrities, without their knowledge or permission, to entice customers to trade in CFDs. Clients were initially induced to make small investments and, in some cases, were then pressurised by the firms to invest further sums of increasing amounts. Despite having invested significant sums with the firms, some customers remained unclear about the products they had been trading and some were encouraged to take out credit to make additional investments. Others had been inappropriately categorised as professional investors and some were given explicit advice on which trades to make. The FCA believes that a number of customers lost over £100,000 as a result.
In light of this, the First Supervisory Notices imposed a number of requirements on the firms, including:
- They must not conduct any marketing activity to UK residents.
- They must not conduct any regulated activities with, or in respect of, UK residents.
- By 1 June 2020 they must display prominent notices on their trading platforms and websites that they are not permitted to provide regulated financial services to UK residents.
- By 4 June 2020, in respect of all UK resident clients, they must close all open trading positions and liquidate positions into pound sterling. Any positive cash balance held by a UK resident client must be paid back to the client as soon as practicable and, in any event, by 11 June 2020.
- Also by 4 June 2020 they must notify all UK resident clients by email that they can no longer provide investment services to them.
Prompted by the FCA action, the Cyprus Securities and Exchange Commission has also taken action against the firms.
In recent years the FCA has supported the restriction of the sale, marketing and distribution of CFDs to retail clients in light of the very real financial risks these products pose, particularly when marketed to vulnerable or inexperienced investors as seen above. The FCA's removal of the passporting rights for these four firms has effectively prevented them from providing these high risk products to the UK market. In light of Mark Steward's comments that "the FCA's investigations into the sector are continuing", Enforcement Watchers should expect to see further Enforcement action in this area.