Implementing the Consumer Duty in the Contract for Difference (CFD) portfolio [pdf]

The Financial Conduct Authority, FCA, has published an open Dear CEO Letter addressed at firms who engage in the provision of contracts for difference (CFDs), in spread bets, or in „rolling spot“ foreign exchange as regards the upcoming new consumer duty.
Among other things, the letter
– reminds firms of the implementation timeline of the new duty,
– summarizes the key pillars of the duty,
– outlines how these pillars apply towards such firms,
– provides feedback from a recent review of firms‘ level of adaptation to the new duty,
– sets out the expectations of the FCA in this context, and
– summarizes some key issues firms shall take into account when transposing their new requirements.
Some of the key issues addressed in the letter are briefly summarized below. It shall be noted in this context that the summary is far from complete which is why affected firms MUST review the original letter.
—————-
#### The key pillars of the new consumer duty
The new duty puts upfront the interests of consumers (hence the name) and requires firms to adhere to stringent rules in the following four key areas:
1. communications: firms must ensure that consumers get all the information they need to make informed decisions.
2. products and services: firms must ensure that their products are designed in a way that ensures that they meet the needs of consumers and that – in turn – they are only sold to those customers whose needs they are intended to meet.
3. customer service: firms must ensure that their levels of customer service meet the need of consumers and that such service does not hinder clients from achieving their desired outcomes.
4. price and value: firms must ensure that the products offered to retail customers are priced at fair value.
—————–
#### The implementation timeline
– The policy statement to the new duty was published on July 27, 2022 (please see EventID 16865 in this context for more information).
– A corresponding guidance (FG 22/5) was issued at the same time.
– The FCA expects / expected that by October 2022, all management boards have agreed upon a plan to implement the new duty.
– By April 2023, manufacturers of products should have concluded their reviews to ensure that their products or services meet the above noted requirements (area 2 and to some extent area 1 noted above) and should communicate any relevant information to their distributors.
– On July 31, 2023, the duty comes into force for new or renewable products and services.
– On July 31, 2024, the duty comes into force for legacy products or services not subject to any renewals.
—————–
#### Application of the new duty towards firms engaged in CFD trading, „rolling spot“ foreign exchange trading, and spread bets
Generally speaking the new rule applies to all firms and persons that are engaged in manufacturing or distribution of products and services designed for or targeting retail investors – regardless of their size or business scope. Specifically, the FCA notes that „all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer“ will be in-scope of the new requirements. Depending upon the nature of a firm’s business, firms may need to adopt different measures or review different business functions to accommodate the new consumer duty.
Independent from any specific business models, but given the high risk nature of CFD or „rolling spot“ foreign exchange trading, the FCA expects in-scope firms to:
– carefully assess their target market and ensure that the products are only marketed towards „suitable“ customers, that is customers with an adequate understanding of the risks involved to make any such investment decision;
– regularly review their products and services to ascertain that the product features still match the targeted audience;
– review, identify, and mitigate any potential conflicts of interest as regards the trading of such instruments;
– review customer interactions and communications to ensure that investors receive all the information on the products – particularly on the risks involved – prior to engaging in any CFD or „rolling spot“ foreign exchange trading;
– review their marketing and distribution practices to ensure that they are not „causing foreseeable harm“;
– review same practices so as to ensure that they are not inducing customers to potential investments they wouldn’t otherwise make, e.g. by using „gamification“ types of on-line investment tools; and
– ensure that their customers do not encounter any hurdles when wanting to close out existing positions or accounts altogether.
—————–
Finally, the FCA concludes by stating that it will closely monitor firms‘ marketing approach towards customers and their implementation progress of the new duty. Due to the high risks involved in the trading of CFDs or „rolling spot“ foreign currency „futures“, the FCA will put a key focus on such assessments. The FCA also notes that it will not refrain from taking enforcement action, if firms don’t live up to their expectations.