Introduction: The FCA’s Approach to Contracts for Difference (CFDs)
The latest “Dear CEO” letter outlines the FCA’s strategic focus for the next two years in the CFD portfolio sphere. It is noted that the Letter highlights the FCA’s continued focus on identifying and addressing the risks associated with CFDs directed to retail consumers. Recognising the risks associated with CFDs for retail investors, the FCA’s strategy is that of strict regulatory oversight to mitigate harm.
Amongst the FCA’s approach to minimise potential harm to consumers, are key focus areas such as enforcing transparency, fair pricing and robust risk disclosures. Heightened focus is also attributed towards protecting retail consumers, particularly to those who lack the financial resilience to absorb losses from such speculative products. Further, the Dear CEO Letter shows the FCA’s efforts to align its CFD provider strategy with the broader Consumer Duty initiative.
Summary of the FCA’s 2024 “Dear CEO” Letter
Notable points from the Dear CEO Letter include:
- Consumer Duty Compliance:
The FCA expects firms to collect and quantify evidence to show that they are delivering good outcomes for retail consumers and are meeting the requirements under the Consumer Duty.
Firms should be able to demonstrate that due consideration is given to delivery of fair value in areas including:
- Spreads
- Overnight funding charges and commissions (where applicable)
- Market Integrity and Abuse:
Firms are expected to enhance surveillance systems and ensure robust reporting mechanisms for suspicious trades.
- Reducing Risks from Firm Failures:
Firms must maintain robust client fund protections, particularly in managing Title Transfer Collateral Arrangements (TTCAs), especially when over-reliance on TTCA monies to fund hedges is identified, and this is not properly considered in the firm’s ICARA. In addition, the FCA stresses that it will continue monitoring implementation of IFPR, via reviews of regulatory returns and information requests.
- Addressing “Halo” Firms:
The FCA is focusing heavily on firms that misuse their FCA authorisation (“halo effect”) to imply regulatory protection while primarily directing clients to offshore entities. Firms with minimal activity or loss-making operations will be expected to demonstrate credible business plans or cancel their permissions.
- Operational Resilience and Outsourcing:
Firms should ensure that they maintain stable and resilient IT infrastructure especially when such services are outsourced to third party providers and/or other group ‘affiliates.’ The FCA expects documentation of due diligence and oversight that is conducted on all outsourced operations, and to reflect such arrangements through the ICARA processes and documentation. Wind-down plans should also contain outsourcing complication arrangements.
- Distributors and Appointed Representatives:
Firms should oversee their appointed representatives and distributors effectively, ensuring these intermediaries deliver tangible value to consumers and are meeting Consumer Duty obligations.
Next Steps for CFD Firms
The FCA expects all CEO’s of CFD firms to read the Dear CEO letter and take the following actions by the 31st of January 2025:
- Review and discuss this letter with other directors and/or the Board and agree next steps. This meeting, including agreed next steps must be documented and available upon request.
- Where a firm is not meeting the rules and standards outlined in the letter, the FCA expects to be notified immediately, including an action plan that details the remediation plan and remediation actions that are taking place.
The FCA has also warned that it aims to conduct a multi-firm review on CFD firm’s adherence to their Consumer Duty obligations, and in particular, the ‘price and value’ outcome.
How Complyport can help
Complyport, a leading compliance and regulatory consultancy, can support CFD Firms on the key aspects highlighted in the Dear CEO Letter. We can help CFD Firms meet their Consumer Duty obligations, mitigate the risk of market abuse, address the issue of capital adequacy and liquidity requirements, review their business structure and model, product and service offering, and operational resilience framework.
Complyport’s specialised team can help with:
- Consumer Duty assessment: Review of Consumer Duty compliance, implementation, monitoring and Board reports.
- Market Abuse training for company staff
- Capital Adequacy and Liquidity review: Review of ICARA process and documentation and support with the implementation of IFPR.
- Review of TTCA arrangements and documentation
- Review of business model and strategy
- Operational Resilience Audit and review of existing framework
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