The FCA has been concerned about firms offering access to contract for difference (CFD) products to clients since at least 2016 and has now published a letter to CFD providers outlining its concerns. The FCA has found that a “significant minority of firms in the sector operate business models that cause significant consumer harm” and has identified three core poor behaviours:

• Targeting consumers for whom CFDs are inappropriate and profiting from their losses.
• Circumventing FCA rules by directing clients to non-UK operators illegally carrying out regulated activities.
• Using unauthorised affiliates, many of whom are social media ‘influencers’ targeting younger consumers.

This FCA letter to CFD firms follows a similar warning to trading app operators around the use of gamification features in their product design.

In both instances the FCA is primarily concerned about the targeting, by some firms, of younger, less financially literate consumers. In both instances “firms profit when customers are persuaded to trade more frequently and/or in larger volumes than they would otherwise have done.” This inherent conflict of interest flies in the face of the new Consumer Duty requirements for delivering good outcomes for retail customers.  

Suspicious activity

The FCA also remains “concerned at the level of suspicious transaction activity in the CFD sector” and is emphasizing the need for adequate systems and controls to prevent financial crime in general and insider dealing in particular.

Against the backdrop of the spectacular collapse of crypto exchange FTX it is interesting to note that the FCA is also concerned about the financial and operational resilience of these firms, as well as the “sub-standard oversight and control of client assets”. That usually means that client assets are not “adequately segregated from the firm’s assets and so might not be effectively ring-fenced in the event of an administration” – which is one of the most egregious compliance failures at FTX and one that directly led to the loss of billions of dollars of customers’ funds.

Finally, according to the FCA “100 EEA-authorised CFD firms entered the UK’s Temporary Permissions Regime (TPR)” on January 1, 2021. Of those firms only one has been authorised, while the application of another is still being assessed. Many of the other firms have either exited or are exiting the UK market, some following regulatory action by the FCA. For those still continuing to operate under the TPR the FCA is using the letter to reiterate the requirement to apply for full UK Authorisation by December 31, 2022.