The Financial Conduct Authority (FCA) is continuing its efforts to embed the new Consumer Duty in all areas of the financial sector, especially where retail customers may be subject to financial harm. The latest Dear CEO letter focuses on Contracts for Difference (CFD) products.
Karan Kapoor is a Capital Markets and Banking Change Professional.
In a previous letter issued in December 2022, the regulator stated that it viewed CFDs as high-risk products, posing a significant risk of negative consumer outcomes. The following examples of harmful behaviour were provided: (i) scam/churn activities, including excessive fees and pressure-sales tactics, (ii) adoption of methods to circumvent FCA rules, such as redirecting customers to subsidiaries in third country jurisdictions that don’t have equivalent consumer protections, (iii) Use of affiliate marketing to facilitate the sale to customers for whom the product may not be appropriate, such as younger customers with lower financial literacy.
With the new Consumer Duty now fully in implementation stage, the latest letter is meant as a clear reminder that CFD providers fall within the scope of the new Duty, and therefore are expected to avoid engaging in detrimental behaviours such as those listed above. The regulator has outlined some key focus areas based on the four key outcomes of Consumer Duty.
Governance of products and services
The FCA has previously stated that CFD firms’ business models often involve conflicts of interest because firms generate revenue from trading, and therefore often encourage customers to trade even when this may not be in their interests in order to maximise the firm’s own revenue.
As a result, the regulator is now asking firms to conduct a review of their product approval processes and distribution arrangements, in light of the Duty, to ensure these conflicts of interests are minimised. Such a review should also aim to eliminate the damaging behaviours listed above like scams and pressure sales tactics.
Price and value
The FCA also highlighted unfair or hidden fees as a problem area in the previous letter on the topic. Under the new Duty CFD providers will need to show that their charges are fair, transparent, measurable, and commensurate with the relevant services and products.
Collaboration between manufacturers and distributors is an integral part of this requirement. The focus is on making sure the final customer receives a good outcome, and as a result firms will need to engage with each other across the distribution chain to review the total costs faced by customers and ensure this is fair. Ancillary costs such as dormancy charges, commissions and holding fees should be included in the consideration of fair value.
Customer Understanding and Customer Support
The use of affiliate marketers and excessive simplification of high-risk products has been highlighted as a problem area for firms. Providers of CFDs should ensure their communications are targeting the customers for whom this high-risk product makes sense, and that their product is presented in a way that reflects its high-risk nature.
Customer support processes should equally reflect the increased risk of negative outcomes that customers face. Firms should avoid putting in place barriers that make it harder for customers to obtain the help they need, especially in the case of vulnerable customers. Firms should promptly action any requests where customer’s financial goals are affected, such as requests for withdrawals, closing of positions, and account closures.
How Delta Capita can help
Delta Capita’s UK Consumer Duty team comprises senior industry practitioners and former C-suite banking executives, who have previously been responsible for the design and execution of multiple FCA conduct initiatives and have been involved in Consumer Duty from the initial stages of implementation planning.
We are currently supporting various clients, including CFD providers, to assess their Consumer Duty readiness, benchmark against industry best-practice and accelerate delivery across various work streams.
To find out more about how we can support you, contact us and speak directly to one of our experts.