FCA warns CFD brokers about insider trading and sending clients offshore

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The FCA, the UK regulator that oversees the provision of domestic retail financial services and markets, has flexed its muscles this week in the direction of online trading platforms about insider trading and sending their customers offshore.

FCA warns regulated brokers about sending their customers offshore

Firstly the FCA warns firms about client churn or client turnover and the practice of sending clients offshore to subsidiaries or similarly named businesses. That offers margin trading services outside of FCA and ESMA regulation and client money protections, away from the strict limits on margining that both regulators enforce.

The FCA has previously removed the passporting rights of CFD brokers, including some based in Cyprus and regulated by their Cypriot counterpart CYSEC, part of a total of 24 firms that the FCA banned from marketing CFDs in the UK.

In December alone, the FCA has warned on these firms which they believe may be providing financial services or products in the UK without FCA authorisation including:

FCA highlights the high risk nature of CFDs

The FCA reminded CEOs that it regards CFDs as highly leveraged derivatives that, when combined with adverse price moves, can create significant losses for customers.

Sarah Pritchard, Executive Director of Markets at the FCA was quoted as saying that:

“We have set out the standards we expect CFD firms to demonstrate in order to protect consumers and ensure market integrity. CFD providers authorised in our regime must sell products appropriately”

She also said

When the new consumer duty (rule) comes into effect, will need to ensure that products deliver good outcomes for retail consumers. We will not hesitate to take swift and assertive action where we identify harm.”

What is Consumer Duty?

Consumer Duty is a new FCA principle that UK firms will have to adhere to. It aims to achieve what is described by the FCA as good outcomes for the retail customers of financial services businesses.

Specifically, FCA-regulated businesses will be required to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
The new rules will be introduced from the end of July next year.

To the layperson that sounds a lot like existing directives in the FCA COBs or Conduct Of Business regulations and the TCF or Treating Customers Fairly directives, but that’s a discussion for another time.

FCA warns CFD brokers about not reporting insider trading

Spread betting brokers and CFD trading platform CEOs have also been taken to task on another matter, namely insider trading.

Where the FCA believes that firms are not doing enough to identify and report suspected insider dealers.

In its “Dear CEO” letter the FCA reminds executives of the potential for fines and bans for not doing enough to identify and report suspected insider traders.

Indeed in October, the FCA fined Sigma Broking £531,000, for failures in trade reporting and for not submitting suspicious transaction reports. Two of the firm’s directors were also banned from holding regulated roles in future.

Increased consumer protection is always to be welcomed and the FCA’s comments reinforce the message that you should only deal with a regulated broker here in the UK and not offshore. However, the regulator often appears to be going over old ground.

At the Good Money Guide, we believe that one of the best ways to encourage better outcomes for retail customers is to increase consumer education.

But that has to be a two-way street, and you the client have to want to be educated about the positive and negative aspects of leverage trading, and running a margin trading account sensibly, without taking excessive risk or overtrading.

FCA started banning Cypriot CFD brokers from passporting on to FCA register in 2020

On 01/06/2020 the FCA stopped four Cypriot investment firms offering CFDs to UK investors for using fake social media ads to entice CFD clients to sign up. You can read the notices from the FCA for each broker here:

For more information on how to spot CFD scams read our guide to CFD (contracts for difference) scams.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said:

‘The FCA has removed passporting rights for these firms which effectively stops them from continuing to provide these types of products in the UK. We welcome the further action taken by the CySEC. The FCA’s investigations into the sector are continuing.’

The FCA’s action was also highlighted in The Times, but even established national press outlets have unwittingly promoted investment scams in the past.

Unauthorised celebrity endorsements for CFD trading

The ban comes after claims these firms directly or indirectly used unauthorised celebrity endorsements on social media to promote CFD trading. The FCA has ordered them to stop selling CFDs to UK customers, to close existing positions with UK customers, to return UK customers’ money and to notify UK customers of the FCA’s action.

The barred firms are entitled to appeal the FCA’s decision and seek a review of the action. However, the FCA states that they estimate that these firms have no presence in the UK, their corporate address as in Cyprus and that UK investors could have lost hundreds of thousands of pounds in these investments.

Using fake celebrity endorsements is not a new thing for financial advertising. These fake adverts circumvent advertising network rules but still manage slip through the net.

What does this mean for the CFD industry?

This is a good thing for UK regulated CFD brokers.

There is a big difference between brokers that responsibly offer CFDs, whose interests are aligned with clients, and those CFD brokers that just exist to rip people off.

There have been big changes in the CFD industry over the past few years. For example, there is less B-booking, the days of churn and burn are over and CFD brokers are looking to expand their investment offering.

When we spoke to June Felix the CEO of IG, she was very keen to highlight the fact that they do not trade against their clients. IG also offers SIPP and investment ISA accounts where clients can hold their long term investment alongside their short term speculative trading.

Commenting on the recent news a spokesperson from IG said:

IG wholeheartedly welcomes the FCA’s comprehensive action to close down these firms. For many years we have seen UK consumers targeted and harmed by firms based outside of the UK acting poorly and in some instances illegally.”

Find out more about investment scams you need to look out for:

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