UK CFD brokers fail with regard to appropriateness assessments – FCA review
CFD firms continue to fail with regard to risk warnings and assessments of prospective clients’ knowledge, according to the UK regulator.
The UK Financial Conduct Authority (FCA) is apparently focused on the CFD industry today. Earlier, it announced a delay in making final its conduct rules for the sector. Adding to that, the regulator published the findings from a review of appropriateness assessments for sales of CFD products, which covered a sample of 23 firms.
The findings highlight several particular areas of concern regarding the way CFD firms assess the appropriateness of their clients to trade CFDs.
- Evaluation of prospective clients’ knowledge
The FCA review found a reliance on irrelevant or unsupported information in assessments. A firm’s assessment questions should seek to obtain from the client relevant information about the client’s knowledge and experience.
A particular point of concern identified relates to assessment questions which ask applicants to confirm that they have attended a seminar or course about CFDs, or whether they have used a demonstration platform to gain “experience”. The problem is that such an assessment of appropriateness gives undue weight to these factors.
- Inadequate risk warnings
In case potential clients fail the appropriateness test, they should get a risk warning. When presenting a risk warning, applicants should not be asked to confirm an intention to proceed with a transaction as the next step in the application process. The FCA review found that where prospective clients fail the appropriateness assessment, but can easily override the risk warning and proceed to open an account, a high proportion of clients proceed to enter into CFD transactions.
- Failed applicants
In most cases, firms did not give substantial consideration to whether an applicant who fails the appropriateness assessment (and receive a risk warning) should still be allowed to proceed. This permitted prospective clients to override the appropriateness assessment and risk warning and proceed to trade without substantive deliberation.
The FCA warns that by doing this, some firms may be failing to comply with their obligations in relation to customers’ best interests.
- Oversight failures
The FCA review found firms lacking evidence of board minutes or contemporaneous notes of senior management discussions. These are compliance failures too.
- Future action
The FCA is concerned that CFDs are “reaching a wider target market than is likely appropriate”. The regulator will consider enforcement investigations or other action as appropriate, including in relation to firms that were included in the review.