Enforcement Watch

Deutsche Bank Libor/Euribor settlement includes substantial Principle 11 fine

"Dear CEO" letter to spread-betting firms

In February, the FCA published a "Dear CEO" letter it had sent to around 100 authorised firms dealing in contracts for difference (CFD's).  As is well known, such letters are often the precursor to regulatory action in a particular sector, and they also better position the FCA to complain about future misconduct of a type addressed by the letters. 

The "Dear CEO" letter relates to those firms offering CFD's on a non-advised basis and focusses on obligations (under COBS 10) to assess the appropriateness of CFD's before allowing clients to trade.  In essence, COBS 10 requires an assessment of a prospective client's experience and knowledge.   If CFD's are judged not appropriate for a client, then the firm must warn the client. Ultimately, however, the decision to trade or not remains with the client. 

The FCA assessed ten firms of varying size and determined many were not properly conducting their appropriateness assessment.  The issues identified included using a "scoring system" that gave weight to facts such as age and length of time at an address over the key issues of experience and knowledge, failing to ask basic questions about prospective clients' experience, and asking clients to self-certify their understanding instead of firms assessing appropriateness themselves.  Even when firms judged that CFD's were not appropriate, the FCA found that the mandatory risk warnings were nonetheless often unclear. 

In addition to concerns regarding appropriateness, the FCA also identified concerns regarding the sample firms' anti-money laundering procedures.  This included a failure to conduct enhanced due diligence on high risk clients.

This "Dear CEO" letter needs to be taken seriously by CFD firms. The FCA's perception, given the performance of its sample, is that there are more widespread failures across the sector.  This increases the risk of regulatory action being taken. In the context of the FCA's findings about appropriateness in particular, it is worth recalling that the FCA has as one of its statutory objectives the protection of consumers. Moreover, that this is with express reference to the inherent riskiness of different products and varying levels of consumer knowledge and experience.  This gels neatly with the themes of this recent "Dear CEO letter" and the FCA's perception of CFD's as complex products that may result in significant losses, potentially for inexperienced retail clients.