FCA CFD Strategy: Key Compliance Priorities and Expectations for CFD Firms

The FCA published a Dear CEO letter at the end of 2024, setting out its strategy for CFD firms over the next two years. The letter is addressed to CFD providers and distributors, and gave firms until the end of January 2025 to agree a plan with board members and key decision makers. Now that the deadline has passed, CFD firms should be well underway in turning the plan into actioned deliverables to meet the FCA’s latest expectations. And if you haven’t started yet, now is the time to revisit the plan and get yourself aligned with these requirements.

Key Findings from the FCA’s CFD Dear CEO Letter

The letter raises concerns across key areas that must be immediately addressed:

• Consumer Duty
• Market abuse and market integrity
• Firm failure
• Halo firms
• Diversified business models
• Appointed representatives
• Operational resilience and outsourcing

Given the breadth of findings, it’s important that CFD firms establish a plan for delivery on all the findings. Without adequate planning, you can find yourself overwhelmed by the number of actions.

Consumer Duty Expectations for CFD Firms

By now, firms should be very familiar with their Consumer Duty exposure. Despite this, the FCA highlights several key areas that CFD firms must give particular attention to.

Appropriate Client Targeting

The FCA reiterates the importance of appropriate client categorisation arrangements by CFD firms, particularly when ‘opting up’ clients from retail to elective professional. Your marketing should be appropriate and consider your client’s capacity to absorb potential losses. Be prepared to demonstrate how you’ve adequately concluded a client’s loss capability, and not merely taken the client’s opinions on their own appetite for loss at face value.

Client Sophistication and Knowledge

Similarly, client categorisation should consider investment sophistication and knowledge. CFD firms should ensure they focus on ensuring clients fully understand the nature of the product and associated risk, given a high percentage of clients lose money trading CFDs.

Vulnerabilities and Protections

Given the loss of regulatory protection once a client is recategorised from retail to professional, it’s vital to give additional thought to those of a vulnerable nature. The FCA specifically calls out clients at risk from the potentially addictive nature of certain types of CFD trading. Demonstrate how you consider vulnerabilities such as trading limits, clear risk warnings, and training to ensure sales practices don’t exploit clients.

Market Abuse Surveillance and Financial Crime Controls

The FCA remains concerned about the market abuse risk posed by CFDs. Fuelled by the large number of STORs that are submitted by CFD firms, the regulator reminds firms of the financial crime risks posed by organised criminal gangs using CFD instruments to trade upon inside information or in manipulative ways, skewing the market in favour of criminals.

Reviews of market abuse surveillance arrangements remain a key supervision tool of the regulator. If you’re a CFD firm, be prepared for the FCA to enquire into your systems and controls for post-trade monitoring in line with Article 16 of the UK Market Abuse Regulation.

A thorough assessment of your surveillance arrangements should consider at least the following:

Market Abuse Risk Assessments

Have you fully identified and assessed your market abuse risks? Are they tailored for your firm based upon your trading activities, the markets you are exposed to, and your client base?

Surveillance Systems

Does your surveillance consider the full range of instruments that you trade? Is your calibration tailored to those instruments? Have you applied enhanced surveillance to areas that present the highest risk to your firm?

STOR Submission Procedures

Are you submitting STORs in a timely and accurate manner? Have you provided adequate training to staff to ensure internal escalations are of the highest quality?

Preventative and Detective Measures

What are you implementing to ensure you have proactive measures to protect your firm from market abuse, rather than merely reacting to risks post-trade? How are you identifying and mitigating market abuse risk before it crystallises?

Reducing Harm Through Prudential and Wind-Down Planning

“No firm in this portfolio is too big to fail…”. Firm failure is a part of business, according to the regulator, whose position remains the same. It’s the systems and controls put in place to ensure an orderly wind-down with minimal impact to clients that really matter.

The FCA will monitor this in two key areas: capital and liquidity management, and arrangements that lower protection of client funds.

Capital and Liquidity Management Requirements

The letter acts as a reminder of your obligations under the IFPR, including the requirements to maintain and review your ICARA. The FCA also highlights previous observations of firms that have struggled to adequately calculate liquidity risk and stress-testing frameworks. The regulator will follow up on suspected prudential weaknesses and misreporting because of its review of regulatory reporting and data requests.

Managing Risks Associated with Title Transfer Collateral Arrangements

Title Transfer Collateral Arrangements (TTCAs) aren’t permitted for retail clients and can only be used if legitimately needed. When providing TTCAs, ensure your systems and controls adequately prevent over-reliance. You must also ensure client assets are brought back under the CASS safeguarding requirements when there’s no longer a requirement for the TTCA.

The FCA observed that 40% of firms in this portfolio hold client money under TTCAs. Given that client assets held under TTCAs may be subject to delays or value reduction if a firm fails, this can present a genuine risk to clients.

You’re expected to act appropriately in the set-up of TTCAs and not use them as a vehicle to circumvent regulatory requirements. We advise implementing the following:

• Requirements under TTCAs and CASS – Ensure staff at all levels of your organisation understand how TTCAs can be used (and how they shouldn’t).
• Robust policies and procedures – Make sure your documentation outlines your use of TTCAs, including assessments for removing client assets out of the TTCA and back into the scope of CASS.
• Control implementation – Set up controls to monitor excess collateral amounts and track client inactivity.

FCA Focus on Halo Firms

Approximately one in five firms in the portfolio appear not to be using their regulatory permissions. This gives rise to ‘halo firms’, i.e. firms that are part of wider international groups and use their FCA authorisation as a sign of legitimacy and comfort for clients. Once onboarded, these halo firms pass clients to different entities outside the jurisdiction of the FCA and outside the scope of UK protection.

The regulator is also concerned with change in control requests offering entry routes to UK authorisation without going through the scrutiny that comes with a full authorisation application.

For both, the FCA will continue to scrutinise businesses seeking halo status. Existing firms doing little to no business may be invited to cancel permissions. Acquiring firms can also expect scrutiny similar to a full authorisation application for change in control requests.

Business Model Diversification Risks

Aligning with its Consumer Duty observations, the FCA has concerns that moves into diversification can result in inappropriate marketing to inexperienced retail clients, particularly younger investors.

Though the regulator wants to avoid blocking healthy competition, drastic changes to a firm’s business model may indicate serious issues.

Where significant expansion of business activities results in increased client onboarding, firms are expected to review and consider how liquidity obligations may have changed, potentially requiring additional capital resources.

Oversight of Distributors and Appointed Representatives

Despite previous action, the FCA voices concern that distributor and appointed representative arrangements are giving rise to halo firms and/or leading to unjustifiable client costs when accessing CFDs through them.

CFD firms still acting as, or engaging with, distributors are likely to be targeted by the regulator as part of its deep-dive reviews of business models to consider client outcomes and their use of regulatory permissions.

Operational Resilience and Outsourcing Oversight

Finally, the letter offers a reminder of the inherent risks, and regulatory obligations around stability, when using IT platforms for the delivery of operational functions. Minimising preventable harm remains a key driver of the operational resilience regulatory framework.

Outsourcing partners should equally be scrutinised as part of due diligence and oversight arrangements. This means ensuring prudential arrangements, including the ICARA, adequately consider outsourced services. Firms should consider the complexities of outsourcing and ensure risks are mitigated in the event of operational outages and/or the wind-down of an outsourced service provider.

Actions CFD Firms Should Take Now

If you’re in scope, we recommend reviewing and considering the range of topics presented in this letter. By now, you should have a plan in place. However, if you’re still considering how to execute it or need additional support, our team can help turn your plan into actionable deliverables and meaningful changes.

How Ocorian Supports CFD Firms in Meeting FCA Expectations

With expertise across all the regulatory topics mentioned, we can assist by reviewing existing arrangements and advising on enhancements to keep you aligned with expectations. Our managed service allows us to run market abuse surveillance and communications surveillance on your behalf, while giving you access to technology solutions.

If you’re unsure whether your current controls are up to standard, we can help with reviews, health checks, and remediation to keep you compliant.

We can also assess your capital and liquidity management processes to ensure they stand up to scrutiny, including an independent review of your ICARA and its underpinning calculations.

Get in touch to find out more about how we can help you stay protected.

Author: Monica Rodriguez, Peter Bowyer