The FCA issues warning to brokers regarding how they attract new clients

Article originally appeared on Leeprate:

The UK Financial Conduct Authority (FCA) has issued a ‘Dear Broker CEO’ letter specifying problematic areas regarding onboarding of clients by UK CFD brokers.

The letter, signed by Megan Butler, Executive Director of Supervision Investment, Wholesale & Specialists Division, is published after an FCA UK review of the procedures for taking on new clients in a sample of ten firms that offer CFD products.

In particular, the FCA reviewed:

the firms’ approaches to assessing the appropriateness of CFD trading for prospective clients;
initial disclosures to clients;
anti-money laundering (AML) controls;
client categorisation.

Appropriateness assessments

The review led to the conclusion that some firms were unable to assess appropriateness and to warn clients for whom CFDs are not appropriate. For instance, some firms did not gather sufficient detail regarding the types of service, transaction and designated investments with which the client is familiar. Many did not consider the clients’ previous experience and knowledge.

The watchdog also identified poorly worded risk warnings that did not set out the nature and risks of CFD products in a manner that was clear, fair and not misleading .

Anti-money laundering

Some firms in the sample did not have AML systems and controls in place which were proportionate to the nature, scale and complexity of their activities. In particular, the FCA found that although firms were conducting adequate customer due diligence (CDD) on standard risk clients, many were not conducting enhanced due diligence on clients identified as high risk. Also client AML risk assessments did not often take into account a range of factors and instead focused on jurisdictional risk, limiting their effectiveness.

Client categorisation

The FCA is concerned that firms offering CFD products might be incorrectly categorising clients as ‘professional’. However, eight of the ten firms assessed had classified all of their clients as ‘retail’, giving them the highest level of protection.

Implications

The FCA calls the results of the review poor and voices its concerns of a high risk that CFD providers industry-wide are not meeting the requirements of the rules when taking on new clients and/or are failing to do enough to prevent financial crime. That is why the FCA asks broker CEOs to consider whether their firm complies with FCA requirements for sales of CFD products and the points raised in this letter.

You can view the full ‘Dear Broker CEO’ letter by clicking here.