The 2020 FCA sector reviews and the pressures on CFD brokers keeping their retail clients
The UK conduct regulator has recently been publishing a variety of outputs which have sought to set out and promote its thoughts on the key challenges and risk threats posed by the core sectors of the UK financial services industry, and to give its overall views on how each specific sector and its participants are seen to be performing.
Since the beginning of 2020, this has notably included a number of ‘Portfolio’ strategy documents, where it has sought to provide a heads-up in explaining its overall supervisory approach against the context of core sector/firm-type areas of current regulatory concern and interest. And in mid-February 2020, it also issued its separate broader analysis and consolidated assessment of the developments, changes, and impacts prevailing across the UK market that will be driving its own ongoing regulatory focus and planning priorities into 2020 and beyond (see FCA Sector Views 2020 issued on 18/2).
As well as some common market and environmental drivers and dynamic themes e.g. financial-technology (Fintech), artificial intelligence (AI) and also crypto-asset developments, etc. all shaping user participation and experiences the latest sector-focussed document highlights the FCA’s more obvious sector-related views and thoughts. The most relevant sector view(s) therein for the close attention of CFD brokers are referenced within and around the area of ‘Retail Investments’ and perhaps less notably ‘Investment Management.
CFD products and services within retail investment
For all UK CFD broker firms, such FCA outputs provide an important and opportune moment to ensure their own internal planning, priorities, and governance commitments remain suitably reflective and aligned with the messages and topical concerns of its principal conduct-of-business regulator. Whilst a ‘caveat emptor’ (buyer beware) approach might still largely prevail in regard to dealings with clients properly classified as ‘professional’ or other ‘eligible counterparties’, the FCA continues to rigorously place most of its emphasis on adequately protecting the needs and interests of retail clients.
The FCA’s views concerning ‘Retail Investments’ specifically cover the sale of contracts for difference (CFD) to consumers as a retail investment product, and this includes spread-bets and binaries. But it is the fact that CFD’s are deemed to be a highly speculative and especially risky investment product that their marketing and vulnerability to retail consumers have seen the recent and ongoing temporary CFD (and also CFD-like options and bond-related) interventions and promotion measures and restrictions to mitigate and ring-fence the perceived exposures and harms. As an example, the FCA has reported estimates that almost 80% of retail client accounts are loss-making, with those losses estimated at over £1bn annually in CFD-sector products.
Therefore, the availability and access to CFD’s simply as forms of investment and trading involving retail investors has become an intense area of the FCA conduct regulators agenda and attention for some time now. This directly relates to the judged and perceived higher-risks, complexities, and potential consumer harms inherent with the products and underlying services involved and has of course already seen the FCA impose and maintain market restrictions and conditions in wanting to actively mitigate the potential and perceived harms and losses of CFD trading and the way they are sold to the most vulnerable consumers.
The importance of compliance culture within CFD brokers
The UK FCA has increasingly been placing a visible emphasis, in its own supervisory profile and other principles-based actions and interventions, towards defining and advocating its expectations around the ethical and behavioral approaches expected from any UK conduct regulated firm(s). Indeed, to further underline the topical significance of this subject, during early March (see FCA DP20/1 issued on 5/3) the FCA has sought to promote its emerging views and approach by expounding its role and ambitions for transforming the culture across the entire UK industry through a range of purposeful and sustainable means and measures.
But also do not forget, its’ now expanded Senior Managers & Certification Regime (SM&CR) has similarly placed a renewed and even clearer responsibility and accountability on those key individuals engaged in both setting and maintaining the required business and cultural standards, consumer protections, and regulatory outcomes too.
In regard to CFD business and the recent ‘temporary’ product interventions and restrictions affecting this sector, firms’ should be very mindful the FCA is acutely alert to practical attempts to encourage ‘retail’ clients to opt-up their client classification/status to ‘elective professional’, or contract with third affiliated third-country firms, in order to circumvent its leverage restrictions. This behavior is likely to be strongly challenged and could directly lead to the firms’ broader cultural and fair-treatment-of-customer (TCF) principles and expectations to be deemed both unsuitable and unacceptable. Therefore, it is important that CFD firms do not act in a way to inappropriately or unduly influence, direct or promote any retail client(s) to unreasonably amend or accept a change or uplift to their client classification or status,. And especially, if it might consequentially be considered to wilfully or adversely circumvent its’ otherwise expected regulatory obligations.
The efficacy of the CFD sector measures by the FCA/ESMA
Working restrictions and conditions affecting CFD sector business remain in place to actively mitigate the potential and perceived harms and losses to vulnerable consumers, and in the UK these do directly echo the European-led position and actions of its own central regulator and supervisor i.e. the European Securities & Markets Authority (ESMA).
Whilst the UK remains in the current ‘transition phase’ of the ‘Brexit’ process (expected to be completed by end of 2020) its financial-services regime remains totally aligned with current and ongoing EU-led regulatory obligations and developments. This includes direct convergence with all the specific compliance and control measures and requirements being adopted, applied, and monitored centrally via ESMA.
However, it remains to be seen if the future (post-transition) agreement between the UK and the EU will see any sustained alignment or continuity in reality, as opposed to any potential divergence of standards and approach affecting financial services thereafter in the longer-term! It remains presently unclear if the UK’s eventual position could represent an opportunity or threat to future reliable cross-border access and business interactions.
CFD brokers now need to be responding
Senior management needs to be suitably briefed on (and demonstrably consider) all the relevant messages and concerns being expressed by the FCA, as might affect their own business model, activities and strategic objectives. For example, firms need to ensure their own technological, product and customer interaction developments keep an objective oversight and control over any consequent vulnerability to cyber-attack and financial crime etc.
Any firms reliant upon cross-border markets and relationships will need to keep a dynamic and multi-scenario approach in their business strategy and planning until it becomes particularly clearer how any international agreements between the UK and other key markets will operate and impact the activities might be conducting.
Overall, management then needs to ensure internal decisions, actions-plans and priorities suitably address support and manage against the delivery of the necessary standards, expectations, and outcomes being expressed by the FCA. The hard reality is the recent and related regulatory publications being covered here collectively provide an essential window into the mindset and prevailing judgements of the UK conduct regulator. And accordingly, these views will now directly shape and impact how it will go on to manage, test, and evaluate both the CFD sector and its specific firms going forward.
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