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CFD Brokers: “Beware of the FSA” Warns Industry Expert

CFD brokers should take special precautions in ensuring they comply with the FSA’s rules or risk significant expense, reputational loss, loss of business and possible bankruptcy according to FSA expert Jayson Upton, City Markets Director at Compliancy Services. This follows the ongoing thematic review into the sector by the FSA that has seen a number of CFD firms have their FSA licenses temporarily withdrawn for failing to follow the FSA’s rules sufficiently.

Although the FSA will be abolished over the next two years, the regulations will remain, and all the current evidence indicates that regulatory scrutiny will remain for CFD firms, applied by the same officials, sitting behind the same desks but from an organisation with a different name.

The FSA has been conducting a thematic review into the CFD sector for the past 12 months. This involves the FSA visiting CFD firms and where they find failings in regulatory compliance then action will be taken. The specific action involved will reflect the failings found. Some firms have been forced to change their FSA Permissions and to inject additional regulatory capital into their business. A number of firms have been instructed to have a “Section 166 Skilled Persons Report” completed. Often the FSA require a firm to stop trading for a period of weeks or months while an independent 3rd party reviews the firm’s business practices. Such reviews can be damaging for firms who may suffer reputational damage, lose customers, and are unable to trade for a period of time, as well as incurring significant charges for the Skilled Persons Report. Depending on the outcome of the report the firm may also be required to pay compensation to clients.

“Many CFD firms we have spoken to are surprised by the level of scrutiny that the FSA have placed on them”, Upton explains. “However, in fact the FSA are just applying the same level of scrutiny to CFD firms as they do to other parts of the financial services retail sectors such as the mortgage or IFA markets. It should be expected.”

CFD firms also misunderstand the nature of the FSA’s use of Skilled Persons Reports according to Upton. “Previously a Skilled Persons Report was used as an enforcement tool, and as such only applied to seriously failing firms. Now, however, the FSA are using Skilled Person Reports as a standard part of their supervisory process. They are being used more often.” The thematic review comes at a time when the FSA is stepping up its campaign of “Credible Deterrence” against regulated firms, banning nearly one per working day in 2010.

The range of failings found by the FSA in CFD brokers varies. Very often firms have uncompliant new client sign up or sales practices. Additionally, often the nature of advice offered to clients does not reflect their risk profile or investment preferences. According to Upton what is surprising is how firms end up in this position. “The CFD sector as a whole simply has not paid sufficient attention to the requirement to implement robust FSA compliance across their business, relying on junior staff or inexperienced external consultants to get the job done. Firms should get real about what it takes to meet the FSA’s expectations in the current environment.”

Upton, a previous FSA supervisor, LIFFE markets regulator and qualified solicitor also acts as a Skilled Person reviewing CFD brokers FSA Compliance. He has a clear message for the industry: “Take steps now to ensure that FSA Compliance is fully up to scratch, and get independent verification of this if you need to, before the FSA come to visit. The cost of getting it wrong is very high, and potentially terminal.”

Contact Details
Jayson Upton Partner, City Markets
Ben Mason Managing Partner
Compliancy Services LLP
0207 956 2926