On Thursday 13 November, the Financial Conduct Authority (FCA) published the findings of its multi-firm review into how contracts for difference (CFD) providers are meeting their obligations under the Consumer Duty, with a particular focus on the ‘Price and Value’ outcome. The FCA’s review revealed a mixed picture across the sector, with both good practices and significant areas for improvement. While some firms have embraced the Consumer Duty as an opportunity to enhance their offerings and client outcomes, others, particularly mid to small-sized firms, have made minimal changes, raising concerns about inconsistent application of the Duty.
This review offers valuable insights for all FCA-authorised investment firms involved in manufacturing, promoting, or distributing CFDs, spread bets, or rolling-spot-forex to retail clients. Below, we summarise the FCA’s key findings, highlight examples of good and poor practice, and set out practical takeaways for firms operating in this space.
For further information or tailored advice, please contact our Financial Services Regulation team or your usual Simmons contact.
Key findings
1. Application of the Consumer Duty and proportionality
The FCA found that while most firms used the Duty as an opportunity to review and improve their products and customer experience, there was inconsistent application across the sector. Some mid to small-sized firms made few or no changes in response to the Duty, suggesting a lack of full consideration of their obligations. This applied to both Duty obligations and specifically to the private and value outcome, on which the FCA refers firms to their Price and Fair value outcome update, see our article on that here. Board reports often restated requirements without providing meaningful analysis or evidence of compliance.
2. Fair value assessments (FVAs)
Most firms assessed CFDs, spread bets, and rolling spot forex in a single document, which is only appropriate if the unique features of each product are fully considered. Good practice included comprehensive peer comparisons and consideration of both monetary and non-monetary factors. However, many FVAs focused narrowly on spread costs, neglecting other significant charges such as overnight funding. There was also inadequate justification for variations in overnight funding charges and insufficient disclosure of these costs to clients.
3. Target market and appropriateness testing
Firms’ approaches to defining and monitoring their target markets varied. Some strengthened appropriateness testing in light of the Duty and introduced or tightened ‘wealth bars’ to better define their target market. However, other firms made minimal changes, raising concerns about the robustness of their processes. The FCA remains concerned that CFDs are still being sold to retail clients who may not fully understand the risks.
4. Vulnerable clients
While onboarding monitoring for vulnerability is widespread, some firms rely solely on reactive measures. The FCA expects firms to regularly monitor outcomes and take proactive steps to identify and support vulnerable clients. Firms that report few or no vulnerable clients should review the effectiveness of their arrangements.
5. Fees and charges, including overnight funding
The FCA found significant variation in the fees charged to retail clients, particularly for overnight positions. While some firms have simplified fee structures and improved disclosures, most could do more to ensure charges are clear, visible, and easily understood. The FCA highlighted the need for clearer explanations of how overnight charges are calculated and their impact, especially given the leverage inherent in CFDs. Firms are encouraged to review PRIIPs Key Information Documents (KIDs), and other relevant client communications, to better highlight the impact of other charges unrelated to spreads.
6. Matched/hedged client positions
All firms allow clients to hold hedged open positions, but the application of overnight funding charges to both sides of these positions is standard practice. The FCA identified shortcomings in the disclosure of the costs associated with holding such positions, which can result in substantial charges for clients with no net market risk exposure.
7. Interest on client accounts
Most firms do not pay interest on client margin deposits, despite charging clients substantial interest to fund long positions. With higher market interest rates, the FCA encourages firms to review whether this approach is consistent with fair value. The FCA encourages firms to have regard to the COBS 22.5.20R financial incentives rule when performing FVAs on paying interest on client balances.
Key takeaways for firms
- Review and enhance FVAs: Firms should ensure their FVAs are comprehensive, considering all costs and charges, not just spreads, and provide clear justifications for any variations.
- Strengthen appropriateness testing: Firms must ensure their processes are robust and reflect the Duty’s requirement to avoid foreseeable harm, particularly for persistent or vulnerable clients.
- Improve fee disclosures: All charges, especially overnight funding fees, should be clearly disclosed and explained in a way that is accessible and understandable to retail clients.
- Proactive monitoring of vulnerable clients: Firms should implement regular and proactive monitoring to identify and support vulnerable clients, rather than relying solely on reactive measures.
- Consider interest on client funds: Firms should review whether not paying interest on client margin deposits is consistent with delivering fair value, particularly in the current interest rate environment.
- Address hedged position practices: Firms should review their approach to charging for hedged positions and ensure disclosures are clear about the costs and potential for foreseeable harm.
Next steps
The FCA will engage directly with selected firms to provide detailed feedback and may undertake further work in areas identified by the review. All firms manufacturing or distributing CFDs to retail clients are encouraged to consider these findings and address any gaps in their delivery of the Duty’s fair price and value outcome. Ongoing compliance will remain a focus of the FCA’s supervisory oversight.
This review underscores the FCA’s continued focus on ensuring fair value for retail clients in the CFD sector. Firms should take proactive steps to address the areas for improvement identified and ensure their practices are fully aligned with the Consumer Duty.
