2nd Feb 2016 11:42
LONDON (Alliance News) - UK regulators on Tuesday warned that providers of contracts for difference, which allow retail investors to bet on movements in financial markets without owning the underlying assets, are failing to live up to what is expected of them with regards to taking on new clients and preventing financial crime.
"Given the poor results that we observed across our sample, we are concerned that there is 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," Megan Butler, the FCA's executive director of supervision, wrote in a letter addressed to CEOs at spread betting firms.
Contracts for difference put clients at risk of losing more than their original investment, especially given the leverage they can take on in taking up a position.
The findings of the Financial Conduct Authority's review, which sampled 10 firms that offer contracts for difference, spread bets and 'rolling spot' FX, follow a board meeting in July, at which the regulator first expressed concern around such businesses. The specific firms in the review were not identified.
The most prominent London-listed online financial trading firm is FTSE 250 constituent IG Group Holdings PLC, while rival CMC Markets is looking to join the market in an initial public offering due to take place this week.
AIM-listed rival Plus500 Ltd was the subject of regulatory scrutiny last year, when the FCA demanded it cease taking on new UK clients due to concerns about its processes, with the company resuming those activities earlier this month.
According to Butler's letter, the review found that most approaches to assessing the "appropriateness" of CFD trading for prospective clients were not in line with rules set out by the regulator.
"In particular, it appears that firms may not have processes that allow them to assess the appropriateness of CFD trading for prospective clients, which could result in firms failing to identify clients for whom CFDs are not appropriate," Butler wrote.
The July board meeting at which the FCA first expressed its concern was noted in CMC Markets' IPO prospectus, which revealed that regulators across "multiple jurisdictions" have recently shown a "particular focus" on enhanced requirements for "appropriateness" tests.
"For example, the FCA specifically highlighted a need for additional investigation into promotion and appropriateness tests relating to CFDs in the minutes to a July 2015 FCA board meeting," the prospectus said.
Meanwhile, the FCA was concerned by its finding that firms' communications did not meet the regulator's expectations. "As an example, risk warnings given to clients did not convey in a clear and fair way that the product was not appropriate for the customer," the FCA's Butler wrote.
The review found also "insufficient" anti-money laundering controls in place to manage the increased risks posed by higher risk clients.
IG, CMC and Plus500 were not immediately available for comment.
By Samuel Agini; [email protected]; @samuelagini
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