CFD review leads to call for firms to act on compliance
05 Feb 2016 12:00 am by Mark Dunn
The Financial Conduct Authority says a sample review of firms offering contract for difference products (CFD) has indicated that providers industry-wide are failing to comply with its client take-on rules and need to do more to prevent financial crime.
The FCA review involved 10 firms, large and small, that offer CFD products on a non-advised basis. Its focus was to assess their take-on procedures in the context of the authority's conduct of business obligations (COBS) and systems and controls rules (SYSC).
In a letter to CEOs, dated February 2, the FCA described the results of the review as "poor". It identified several areas of concern it wanted to highlight to firms across the industry, including evidence that some firms lacked anti-money laundering systems and controls proportionate to the nature, scale and complexity of their activities.
The FCA said firms should examine their own processes and if they identified any similar areas of concern, the authority expected them to have regard for its principles relating to customers' interests and relations with regulators, and to act accordingly.
The review's sample firms had a range of approaches to assessing the appropriateness of CFD trading for prospective clients, most of which were not in line with the relevant COBS. Most risk warnings issued to clients who failed appropriateness assessments were inadequate, and anti-money laundering controls for managing the increased risks posed by higher-risk clients were insufficient.
"Our review identified several key areas of concern, in particular the inability of some firms to assess appropriateness and to warn clients for whom CFDs are not appropriate," says the letter, before detailing specific shortcomings in the process."
Due diligence for high risk
In regard to anti-money laundering, the FCA found that many firms were conducting adequate customer due diligence on standard risk clients, mainly through the use of electronic identification systems. However, many weren't conducting enhanced due diligence on clients identified as high risk. Also, most money laundering risk assessments didn't consider the range of relevant factors, but instead focused on jurisdictional risk, limiting their effectiveness.
Under the FCA's SYSC rules, firms must ensure their policies and procedures enable them to "identify, assess, monitor and manage" money laundering risk. They must also regularly review their policies and practices to ensure continued compliance.
The FCA sets out the range of factors that should be considered when identifying money laundering risk and establishing systems and controls. It also lists what the systems and controls should include, such as appropriate employee training, regular provision of information to governing bodies and senior management, and measures to ensure that money laundering risk is taken into account in day-to-day operations.
Overall, the FCA's letter emphasises the importance of Know your customer (KYC) in the compliance and risk area. Firms need to proactively conduct deep due diligence and vetting third parties if they are to successfully minimize risk.
The FCA's letter can be viewed in full here:
- Know your customer (KYC) – a complex and fluid challenge
- Compliance Horizon 2016
- Staying compliant with the Fourth Money Laundering Directive
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