Dear CEO/Director” letter from FCA: A Missed Opportunity for Effective Guidance?

On 06 April 2023, the UK Financial Conduct Authority (FCA) published a letter addressing all CEOs and directors of firms offering Contracts for Difference (CFD) and foreign exchange (FX) products. The letter highlights some important points related to the new Consumer Duty rules, but I believe that its guidance may be too generic and not specifically relevant to the FX and CFD sector.

The new Consumer Duty rules are applicable to all firms in the distribution chain for a product or service that will be made available to a retail customer. The rules demand that financial firms prioritise the needs of their customers and ensure that they receive fair treatment. Senior managers are personally liable for the accurate implementation of these rules and can face regulatory action if they fail to do so. These rules apply to all firms that determine or have a material influence over customer outcomes, not just those with a direct retail customer relationship. The ultimate goal is to create a financial services industry that delivers positive outcomes for customers, fosters trust and confidence, and contributes to the overall stability of the UK financial system.

This letter did not use the common terminology used in the FX and CFD industry.
Furthermore, the letter was subjective in nature as it used phrases such as “good outcome for customers,” which could have been interpreted in various ways.The FCA did not provide explicit guidance on how to evaluate a good outcome for customers trading FX and CFDs or provide a clear definition of what constitutes a good outcome. However, the letter did suggest that financial institutions should consider the amount of money lost or gained by retail consumers when assessing whether or not good customer outcomes are being achieved. This approach may be too simplistic and may not capture all the nuances of good outcomes for customers trading FX and CFDs.

Another issue with the letter is that it fails to give clear guidance to CFD manufacturers who provide liquidity to other CFD brokers based overseas, who then provide CFD products to retail clients based outside the FCA jurisdiction. These are distribution chains operating outside FCA jurisdiction, which can make it challenging for firms to adhere to the guidelines.

When an FCA “Dear CEO/Director” letter is open to interpretation and lacks clear and precise definitions of terms, it can create confusion among senior managers in regulated firms. This can make it challenging for them to understand the FCA’s expectations and to take appropriate actions to comply with regulatory requirements.

Despite these issues, the letter did raise an important point that the Consumer Duty rules apply to all firms that determine or have a material influence over customer outcomes, not just those with a direct retail customer relationship. This means that even firms that provide liquidity to other firms must ensure they are not contributing to poor outcomes for customers.

An essential aspect to take into account in the “Dear CEO/Director” letter is that the Duty applies to all firms in the distribution chain for a product or service that will reach a retail customer. As such, all firms involved in the manufacture, provision, sale or ongoing administration, and management of a product or service to the end-retail customer are within the scope of the Duty.

In this letter, the FCA included two annexes that were intended to provide senior managers with a set of good and bad practices to facilitate their comprehension and effective implementation of the rules. However, in my opinion, these annexes were quite general and not specifically tailored to the FX and CFD sector.

 Annex 1: Principles of Good Customer Outcomes for CFD Firms:

This annex outlines the FCA’s principles for ensuring good customer outcomes for CFD firms. The principles cover areas such as providing clear and fair pricing, ensuring clients have access to appropriate information and support, managing conflicts of interest, and ensuring clients have adequate risk management tools. The principles are designed to help firms identify and manage risks associated with CFD trading, while also ensuring that clients receive fair treatment and are not misled or placed at undue risk.

Annex 2: Examples of Good and Poor Practices in CFD Firms:

or two examples of good and poor practices that CFD firms can follow or avoid in order to ensure good customer outcomes. The purpose of this annex is to provide examples of what constitutes good or poor practice, and to help firms understand how to implement the principles outlined in Annex 1 in a practical way.

In conclusion, while the “Dear CEO/Director” letter from the FCA is a step in the right direction, it is not perfect. As an FX and CFD expert, I believe that clearer and more specific guidance is needed for our sector to ensure compliance with the regulations while also promoting good outcomes for customers.