FCA addresses expectations of providers and brokers on CFD

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On January 25, 2017, the FCA published a webpage to address its expectations of providers and brokers of retail contract for difference (CFD) products. This includes spread betting and rolling spot foreign exchange (FX).

Firms are reminded to comply with the FCA rules and to ensure CFD products are marketed and sold to the appropriate consumers.

Among the items on the page is reference to a Consultation Paper (CP 16/40) that was published by the FCA on 6 December 2016. The CP focuses on enhancing conduct of business rules for firms providing highly speculative products to retail clients. The deadline for submissions on the proposals are closes on 7 March 2017.

The CP proposes changes to improve the conduct of firms and reduce the potential for consumer detriment. The FCA summarises the proposed changes as follows:

  • Standardised risk warnings and mandatory profit-loss disclosure to illustrate the risks
  • Lower leverage limits for any new client with less than 12 months’ experience in trading CFD products
  • Capping leverage at a maximum level of 50:1 for all retail clients, with a leverage limit of 5:1 (20%) for single stock equities for unexperienced clients and 10:1 for experienced clients
  • Preventing CFD providers from using bonuses or benefits to promote their products
  • Considering a range of policy measures for binary bets, once these products are brought into the regulatory scope

A policy statement confirming final FCA Handbook rules is expected in the summer.

The CP was the result of a review of retail CFD providers in 2015, during which the FCA identified poor business conduct, including bad quality of appropriateness tests conducted by firms over retail customers, deficient risk warnings and insufficient anti-money laundering checks.

The FCA stated that according to their sample data 82% of clients lost money on CFDs.

Similar concerns were voiced in the Dear CEO letter, published by the FCA on February 2, 2016.

On the same webpage there is also a list of the areas the FCA will be focusing in the near future:

  • Appropriateness testing
  • Prudential requirements: ICAAP, recovery and resolution plans
  • Client money
  • Senior managers and certification regime
  • Financial promotions
  • Best execution
  • Anti-money laundering

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