Lessons from Cypriot CFD brokers checked-out of the UK market by the FCA?
In a recent two-phased manoeuvre, the UK conduct regulator (FCA) issued at the start of June 2020 details of separate supervisory actions against a number of Cyprus-based CFD-trading firms [‘first-phase’ namely: Magnum FX Cyprus Ltd, Rodeler Ltd, Hoch Capital Ltd and F1 Markets Ltd]. This was then followed-up in mid-June by canceling the UK-registered status of three additional firms [‘second-phase’ namely: Maxiflex Ltd, Maxigrid Ltd and Reliantco Investments Ltd], after notification and consultation with the Cypriot regulator (CySEC), thereby removing their permissions to sell CFD’s to UK consumers using precisely the same EEA passport regime.
Firms incorporated from less well developed regulatory jurisdictions e.g. Cyprus and Malta, might of course seek to utilise (if not intentionally exploit) such perceived ‘softer’ regulatory jurisdictions in order to obtain direct authorisation, in the knowledge that they can then use the MiFID II passport regime to routinely access more rigorous markets across an EU/EEA financial services environment which is supposed to be applying the relevant rules in a common and consistent fashion. Indeed, in the worst-case scenarios, such firms might well seek to use any passport rights in a manner which goes on to then mislead or falsely imply to its target consumers and investors that it itself has a strong local regulatory status and corporate credentials.
The FCA is of course widely cognisant of this dilemma and is recognised to be a robust, visible and proactive global regulator. Indeed, as a dominantly ‘principles’ rather than ‘rules’ based regulator, it expects and allows its own direct authorised firms a degree of working flexibility in showing good conduct and consumer outcomes, but nevertheless maintains clear and robust boundaries of conduct acceptability, alongside perhaps more proactive and rigorous supervision and monitoring.
Prompt regulatory steps to protect UK consumers
Taken collectively, these recent multiple-case actions and measures by the FCA represent an important and notable regulatory development for the FX and CFD sector, where a non home-state regulator has felt it is necessary to largely independently act and intervene to protect UK consumers and ensure fair and appropriate marketing of ‘Contracts for Difference’ (CFD) services into the UK.
The FCA has issued to each of the initial four (first-phase) firms a specific ‘First Supervisory Notice’, compelling each firm to directly respond through the imposition of requirements which effectively and immediately prevent the firms in question from providing services to UK consumers. For the later three (second-phase) firms acted on, it has also effectively removed their ability to provide any investment services in the UK which were previously being marketed using the EU/EEA passport regime.
Intervening with firms directly registered and authorised outside the UK
In each of the four initial ‘first-phase’ cases, the firms were registered and operated from offices in Limassol in Cyprus, being directly registered and authorised by the Cypriot regulator (CySEC) as investment firms. But they were actively using individually registered ‘inward passport’ rights as EEA investment firms, in order to access and market their CFD products to specific UK market/resident consumers. Using this process the firms provided their respective UK consumers with the ability to access and trade in CFD’s through an online platform.
The FCA would have been typically engaged in the protocol of having been prior notified, by the relevant home-state regulator (in these cases by the CySEC). As such, the FCA would expect to have been aware of such firms’ intentions to the exercise their respective passport-rights into the UK market, enabling them to effectively use and apply their home-state (Cyprus) regulatory status on a wider EU/EEA cross-border basis. Under the associated Markets in Financial Instruments Directive (MiFID II), firms can exercise the right to carry-on business in other EEA Member States through either establishing a physical local presence (using a branch passport) or simply providing services cross-border (using a services passport). However, though each firm held permissions to conduct cross-border investment services involving financial CFD’s into the UK under MiFID II, they were each nevertheless required to directly comply with the specific conduct of business (COBS) obligations under MiFID II as transposed into their own domestic home-state (Cyprus) law and regulation.
The need to deliver consumer obligations and protections regardless of borders
Many investment firms and services providers, not just CFD-traders and providers, will openly utilise the advantages and rights of the EU/EEA passport regime to access markets and consumers on a cross-border basis. As such, this provides a quick and tried-and-tested means for firms to extend and apply their own home-state permissions across and into other EU/EEA jurisdictions and markets. But this established mechanism inherently and ultimately relies on both the quality and effectiveness of regulatory environment and oversight necessarily lead by the firms’ own home-state, and the principle of working harmonisation of implemented conduct standards and acceptable practices across all participating jurisdictions.
The FCA’s grounds for its ‘first-phase’ of actions were both formed and taken on the basis it had concluded the respective firms’ were not properly meeting the respective conduct obligations required and expected under the application of MiFID II. It considered that in each case the firms’ respective actions and behaviours were clearly prejudicial to the best interests of specific UK investors and consumers, and importantly reached this determination on the basis that the firms failed to act in a way that actually contravened the MiFID II obligations as implemented under Cyprus law. In particular, these firms were found to have breached the delivery of MiFID II obligations in respect to UK consumers when acting as EEA investment firms under their respective inward-service passport. In this regard, not only was it deemed that the marketing material and advertising activity being used was not adequately or acceptably ‘fair, clear and not misleading’, but that the significance of the risks and losses involved and presented in these cases required immediate and substantive intervention.
It was also noteworthy that again the FCA made clear its views that CFD’s (being by their nature complex, higher-risk and more speculative financial derivative products) are generally unsuitable for inexperienced investors, and require a careful, objective and dynamic assessment of appropriateness and suitability for consumers given the exposure to market volatility, leverage demands and potential loss. This again shines a light on the broader importance and expectation on investment firms in properly assessing the appropriateness of the financial instrument(s) and products they use against personal/individual consumer needs and circumstances.
Finally, it was also clear from an analysis of customer complaints/concerns made directly to the FCA itself, and other evidence and feedback, that some of these firms’ arrangements in respect to disclosure of fees and charges, the timely provision of appropriate information to potential/existing clients on related products and services, as well as the levels of transparency on the underlying nature and risks involved, were all not either acceptably evident or plainly misunderstood or even improperly expressed when looking at the firms’ own documentation, information processes, and evidential behaviours and practices.
Directing firms to cease regulated activities into the UK
The FCA’s supervisory notices issued in the ‘first-phase’ of cases require each firm to effectively and immediately cease conducting any marketing or other regulated activity with any UK resident persons, other than as necessary to close all active accounts and trading positions and to liquidate and return investment funds to such persons. The FCA both informed the CySEC of its own findings and concerns surrounding these initial firms and has subsequently advised it of its due exercise of its own powers of intervention in the circumstances. But it remains to be seen if/how the actual lead/domestic regulatory authority here (CySEC) itself now additionally acts further in its own name.
Whereas, in regard to the more recent ‘second-phase’ cases it does seem the FCA acted slightly more closely and collaboratively with CySEC, who had been engaged in confirming these three additional CFD providers had voluntarily decided to cease providing services in the UK, after the FCA had already raised similar conduct and operational concerns over the provision of services into the UK by these further firms, with no doubt some knowledge of the ‘live’ supervisory notices of the initial ‘first-phase’ cases already very much pressing on their minds! But it seems that CySEC might have taken a lead in notifying the FCA of the firm’s own intentions, which probably precluded any other direct action.
A time to be judged against acceptable behaviour and conduct standards
The respective FSA ’First Supervisory Notices’ involving the initial ‘first-phase’ firms were all dated as issued in late May, requiring the firms in just a short few business days thereafter to have electronically notified every UK resident client affected that they could no longer be provided with investment services, and to outline the measures being taken to return respective funds/balances held by the firm(s) on their behalf. Each firm also had to even more quickly (and almost immediately) ensure that prominent information and notices were placed on their business websites and trading platforms making clear the firm was unable to provide any regulated financial services to residents of the UK. In addition, the firms were expressly told they were unable to deal with any funds being held on account sourced from UK institutions and clients without the FCA’s written prior consent. For the other firms where their UK registration status was cancelled, they were expected to act promptly and keep customers reasonably informed of all steps taken to close all UK business.
Many firms will find themselves operating in a similar manner and purpose, utilising inward-service passport rights into the UK market, and will want to now carefully consider the rationale and available circumstances behind the FCA’s views, decisions and respective interventions here. This will require them to perhaps look at and suitably benchmark their own strategy approaches, as well as internal operational governance and policies as they might apply in regard to both marketing and handling any UK-based business activity and relationships.
But it also interestingly seems apparent that either through a disparity of time, attitude or available evidence, global regulators cannot always seen to be (or capable/willing of) acting simultaneously or with a common strength of purpose! But undoubtedly both the CySEC and the Cypriot Financial Ombudsman will now play an important part in managing any consequent fall-out in terms of any client complaints and compensation claims.