Inactivity fees account for up to 31% of revenues of some CFD brokers, CySEC review shows
For several Cypriot investment firms, the amount received from inactivity fees for the period from July 2019 to November 2019 ranged from €1 million to €1.4 million.
The Cyprus Securities and Exchange Commission (CySEC) has carried out a review of the circumstances that are considered by Cyprus Investment Firms (CIFs) when applying inactivity fees to clients, with the report revealing some alarming practices.
The review covered a sample of 35 CIFs, with the firms reviewed being mostly providers of CFDs. The reference period for the information provided by CIFs to CySEC was July 2019 – November 2019.
Several CIFs did not provide adequate information about the circumstances under which a client and/or a client’s trading account is considered inactive/dormant. For example, the information found on the Terms and Conditions and/or Client Agreements section/tap of the websites of some CIFs, included references only to the charge of an inactivity fee when the client’s trading account is inactive/dormant, without giving further explanation of the circumstances and the parameters under which a trading account is considered as such. A large number of CIFs had informed potential clients or clients that a trading account is considered inactive when there is no “trading activity”, but did not expressly state what constitutes ‘activity’.
When assessing the trading activity of a client’s trading account, a small number of CIFs linked this activity to the number of trades executed, not the act of trading itself. For example, a client’s trading account was deemed as inactive if the number of trades within a period of 60 days was less than 5 trades per month.
A limited number of CIFs linked “Know-Your-Client” (KYC) documentation requirements with the circumstances under which a client’s trading account was considered inactive. For example, one CIF stated that in the event that KYC documents expired and the client failed to provide updated KYC documents, then his/her account would be considered inactive. In addition, a practice was identified whereby a CIF stated in its Terms & Conditions that in the event of a client deposit not being verified within a timeframe of 15 days, or he/she failed to provide all the information required by the CIF, the CIF could charge an inactivity fee.
In general the CIFs did not clarify the quantitative and qualitative factors taken into consideration for calculating the size of the inactivity fee. CySEC also found that a small number of CIFs applied excessively high inactivity fees (e.g. €100 or more) on a monthly basis, without providing sound reasoning for the imposition of such a fee, nor adequate explanation for its calculation.
CySEC was particular concerned that, for several CIFs, the amount received from inactivity fees for the six-month period from July 2019 to November 2019 was excessively high, ranging from €1 million to €1.4 million.
Furthermore, for a number of CIFs, the amount received from inactivity fees for the six-month period from July 2019 to November 2019 seemed to represent a significant proportion of revenue generated for a six-month period, in limited cases as high as 18% – 31%.
Moreover, a small number of CIFs had charged inactivity fees retroactively. This meant clients were charged at the start of the period over which no activity was identified in the client’s trading account, and not after the period that had to pass for the client, and/or his trading account, to be considered inactive.
CySEC advises all CIFs to consider the issues raised against their policies and arrangements in place in relation to their application of the inactivity fee as well as to the relevant disclosures made to potential clients or clients. If, when reviewing the policies and arrangements in place, CIFs identify any weaknesses – they must take immediate actions to ensure compliance.
The regulator says it will continue the assessment of the CIFs’ policies and arrangements relating to the inactivity fees and will consider taking further actions, such as enforcement investigations.