Acting to stop harm: the FCA and Appointed Representatives
Following a review of procedures for taking on new clients in a sample of ten firms that offer Contracts for Difference (CFD products), the FCA issued an open letter - “Dear CEO letter” - identifying several concerns its wishes to highlight across the industry. Clarifying the scope of the review, the FCA specified that Contracts for difference, Spread bets and ‘Rolling Spot’ FX are all designated as a type of ‘CFD’ under the Handbook's Glossary of definitions, which in turn are a type of derivative. Ten firms, of varying sizes, were subject to the review which examined:
The letter from Megan Butler Executive Director of Supervision Investment, Wholesale & Specialists Division spelt out that “All firms operating in this sector should ensure that they comply with the FCA’s requirements when making non-advised sales of CFDs” and “we expect all firms to ensure that their client take-on process meets these requirements”. The relevant provisions are set out in annex to the letter.
The open letter explains the issues identified and asks firms to consider whether they comply with FCA requirements for sales of CFD products. The key focus of the review was to assess the client take-on procedures. The FCA underlined its concern that there is a high risk that CFD providers industry-wide are not meeting the requirements of the rules when taking on new clients so are failing to do enough to prevent financial crime.
Weaknesses identified included:
The letter confirms that 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. Particular issues included the failure to conduct enhanced due diligence procedures on clients identified as high risk. Though the FCA did recognise that adequate customer due diligence (CDD) on standard risk clients was being conducted via use of electronic identification systems. Moreover risk assessments did not often consider a range of factors and instead focused on jurisdictional risk “limiting their effectiveness.”
With the UK implementing regulations for the Fourth Money Laundering Directive due later this year it is clear that the FCA is preparing the path for greater scrutiny and regulation in this regard.
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