FCA has published its review of appropriateness assessments firms make when selling CFD products. The review followed last year’s dear CEO letter which asked firms to consider whether their client take on processes complied with the Principles and COBS requirements.
FCA found that, despite this, firms were not meeting its expectations, especially:
- they were not properly assessing prospective clients’ knowledge – a key concern was that firms were giving undue weight to assertions by clients that they had attended a seminar about CFDs without actually evaluating knowledge and experience. FCA points to ESMA guidance on what firms should be doing to comply with COBS 10.2.1R;
- they were not taking proper account of previous transactions;
- they were not giving appropriate risk warnings at the right time to warn clients who failed the appropriateness test. FCA wants firms to use techniques such as a mandatory cooling off period after the risk warning or requiring the applicant to acknowledge it. Instead it found clients were often able to override the risk warning;
- they did not evaluate whether applicants who failed the appropriateness assessment but who still wanted to trade in CFDs should be allowed to do so. FCA and ESMA note that it would be best practice not to allow the client to proceed. There should as a minimum be meaningful consideration of whether it should be allowed to do so; and
- firms had poor records to evidence how they carried out appropriateness assessments, such as challenges to assessments, board minutes or senior management discussions.
FCA notes that retail distribution of CFDs and similar products remains a key concern, and that it will consider enforcement or other action as appropriate against firms included in the review and others. It also notes firms should consider their systems and practices in view of the upcoming MiFID 2 requirements, particularly those on product governance.