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Dear Chief Executive | Release Date: 1st December 2022

To read a shorter summary of this Dear Chief Executive letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) presents its strategic outlook on the Contracts for Difference (CFD) sector, focusing on firms that operate within this portfolio. This includes substantial and smaller entities across the UK and EEA that predominantly engage in marketing CFDs, spread bets, or rolling spot foreign exchange to retail consumers. The diversity in product ranges and business models necessitates a tailored approach to regulatory oversight, ensuring that specific issues are addressed appropriately.

Regulatory Background and Ongoing Concerns

CFDs are recognised as high-risk derivative products, which pose significant challenges to consumer protection and market integrity. The FCA has previously taken steps to mitigate these risks, but ongoing concerns necessitate continued regulatory vigilance. This communication serves as an extension of past directives and is designed to reinforce and build upon the measures set out in previous Supervision and Policy communications, as detailed in Annex 1 and related FCA press releases.

Board-Level Responsibilities and Compliance Expectations

Firms are urged to critically evaluate the risks highlighted within this communication, determining their relevance and impact on their specific operations. The FCA expects firm boards or executive committees to develop and implement effective strategies to mitigate these risks. Compliance with these expectations is crucial, and firms should prepare for potential scrutiny of their actions and the effectiveness of their responses.

Key Risks and Unacceptable Practices Identified

Scam/Churn Activities:

Certain firms have been exploiting consumers through deceptive promotional tactics and high-pressure sales strategies, resulting in significant consumer losses. Issues identified include misleading financial promotions, excessive or hidden fees, and obstruction of withdrawal requests. Additional concerns include unauthorised provision of investment advice and inappropriate inducements to assume ‘elective professional’ status, thus circumventing regulatory protections.

Circumvention of FCA Rules:

Practices have been observed where firms have redirected retail customers to entities in jurisdictions lacking equivalent consumer protections, or have misclassified consumers as professional clients to evade FCA leverage restrictions.

Misuse of Affiliate Marketers:

The sector has seen improper use of affiliates and introducers, including social media influencers and pseudo-educational providers, who often target financially inexperienced consumers. These affiliates sometimes engage in unauthorised regulated activities, contributing to consumer harm.

FCA’s Strategic Response to Address These Issues

Compliance with Consumer Duty

The introduction of the Consumer Duty sets a higher standard for consumer protection across financial services, demanding that firms act to ensure good outcomes for retail customers. This Duty emphasises the importance of acting in good faith, providing products and services that are priced fairly, enhancing consumer understanding through clear communication, and supporting consumers effectively throughout their relationship with the firm.

Operational Integrity and Market Abuse Prevention

Firms must strengthen their systems and controls to prevent market abuse and ensure operational resilience. This includes addressing vulnerabilities that could lead to financial crime or impact the firm’s ability to operate effectively, particularly in the face of cyber threats and significant market events.

Next Steps for Firm Leadership

By the end of January 2023, all firm CEOs are expected to have engaged with their boards or equivalent governing bodies to discuss the contents of this letter thoroughly and to have delineated clear actions or steps in response. This should include a review of current practices, identification of any gaps in compliance, and development of robust strategies to address potential deficiencies.

Conclusion and Continuing Responsibilities

Firms are reminded of their ongoing responsibilities under the FCA regulations and the necessity for active engagement in maintaining high standards of operation and consumer protection. For any queries or the need to address urgent issues, firms are encouraged to maintain open lines of communication with the FCA.

Key Takeaways and Actions for Compliance

Ensure Comprehensive Risk Assessment: Regularly evaluate business practices to identify and mitigate risks related to CFD trading.

Strengthen Consumer Protection Measures: Implement strategies that align with the new Consumer Duty to ensure that all consumer interactions and products are fair, transparent, and geared towards positive consumer outcomes.

Enhance Operational and Financial Resilience: Review and reinforce internal controls and systems to prevent financial crime, ensure stability, and protect consumer assets effectively.

Engage Proactively with the FCA: Maintain ongoing dialogue with the FCA, responding promptly to any regulatory inquiries or requirements.

This detailed approach is aimed at reinforcing the integrity of the CFD market and ensuring that firms not only meet regulatory expectations but also prioritise the welfare of their clients, promoting a safer and more transparent trading environment.

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