The Financial Conduct Authority has told companies selling complex financial bets to do more to protect customers from losses and guard against money laundering.
The regulator has written to chief executives expressing concern about the results of a survey it conducted into 10 companies that offered products without advice. The report examined sales of contracts for difference, spread bets and “rolling spot” foreign exchange trades, all of which the FCA classes as CFDs.
CFDs are derivative products that allow people to gamble on price movements in shares, commodities and currencies without owning them.
The FCA board ordered a review after a meeting last July because it was concerned that retail punters were exposing themselves to large losses. The authority regulates about 100 companies that offer CFD trades, with more than 100 additional firms registered elsewhere in the EU but trading in the UK.
Its sample of 10 firms found that most assessments of whether a customer was suitable to trade were not up to standard and that the majority of warnings to unsuitable customers were inadequate. Measures to prevent money laundering by high-risk clients were also too weak.
The FCA said many companies did not gather enough detail on customers and their investment experience and used unimportant information such as their age to judge suitability. Customers were also asked to tick a box saying that they understood the risks instead of going through a proper assessment.
In the “dear CEO letter”, Megan Butler, the FCA’s executive director of supervision, said: “CFDs are complex, leveraged products that can put clients at risk of losing more than their original investment. Given the poor results that we observed across our sample, we are concerned that there is a high risk that CFD providers industry wide are not meeting the requirements of the rules when taking on new clients and/or are failing to do enough to prevent financial crime.”
Companies’ checks against financial crime were adequate for standard clients, but many did not carry out extra scrutiny of those identified as higher risk, the survey found. Most checks did not examine enough factors and relied too much on where a customer was based, Butler said.
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