The FCA has highlighted that they will take ‘swift and assertive’ action if it identifies a risk of consumer harm when it comes to the creation/promotion of contracts for difference (CFDs). Over the past decade, the FCA has been monitoring CFD activity. They noted that many firms have attempted to access this market, often from overseas accessing the UK, that have consistently not provided good outcomes. Within the scope of the implementation of the Consumer Duty regime, this has raised further regulatory alarm. CFDs are highly leveraged derivatives and subject to adverse price movements in relevant markets which could also result in substantial losses for consumers.
Executive director of markets for the FCA, Sarah Pritchard, suggested “We have set out the standards we expect CFD firms to demonstrate in order to protect consumers and ensure market integrity. CFD providers authorised in our regime must sell products appropriately, and when the new consumer duty comes into effect, will need to ensure that products deliver good outcomes for retail consumers. We will not hesitate to take swift and assertive action where we identify harm”
The FCA has emphasised that the wrongdoing has been committed by the ‘significant minority’ of firms. The FCA highlighted:
- Scam/churn activities: a small number of firms in the UK’s Temporary Permissions Regime have targeted consumers for whom CFDs are inappropriate and use scam/churn techniques to directly profit from their clients’ losses.
- Circumvention of FCA Rules: Some firms circumvent the FCA’s rules by inappropriately ‘opting-up’ retail consumers to ‘elective professional’ status, sometimes using incentives banned under the FCA’s rules. Other firms were redirecting retail customers to associated CFD providers incorporated in third-country jurisdictions without equivalent consumer protections.
- Affiliate marketers/ introducers: many firms have used unauthorised affiliates to introduce clients, paying them for their introductions. Firms’ oversight of affiliates is often inadequate and sometimes part of a deliberate strategy to exploit consumers, especially when combined with the poor behaviours mentioned above.
- Additionally, the FCA has found examples of companies using unqualified influencers, fake celebrity endorsements, pressure-sales tactics, inducements and some firms giving investment advice without authorisation.
As a response the FCA has written to firms, in the form of a Dear CEO letter which outlines expectations and areas of poor practice. For firms this provides a key insight into the expectation of the FCA, and evidences the way in which CFD firms need to act in order to align themselves with regulatory good practice. The FCA has reported that in 2021, they prevented 24 firms from promoting CFDs within the UK. This preventative action has continued into 2022, demonstrating the continued effort of the FCA to provide strong consumer outcomes and remove ill behaviour within UK financial services.
