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FCA raises ‘contract for difference’ risk concerns

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The FCA has raised concerns over the sale of contract for difference products, warning firms are failing to disclose risks properly and protect against the danger of money laundering.

A contract for difference is a contract between an investor and an investment bank or a spread-betting firm. When the contract has lapsed, the seller will pay to the buyer the difference between the initial value of the asset and the final value.

In a ‘Dear CEO’ letter, published today, the regulator identifies “several areas of concern” across the industry.

The FCA reviewed a sample of ten firms that offer CFD products on a non-advised basis, covering smaller and larger firms.

The review found that most risk warnings issued to clients that failed appropriateness assessments were not adequate. In addition, anti-money laundering controls in place to manage the increased risks posed by certain clients were “insufficient”.

FCA executive director of supervision Megan Butler says: “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.

“In particular, it appears that firms may not have processes that allow them to assess the appropriateness of CFD trading for prospective clients, which could result in firms failing to identify clients for whom CFDs are not appropriate.

“We were also concerned to find that firms’ communications did not meet our expectations. As an example, risk warnings given to clients did not convey in a clear and fair way that the product was not appropriate for the customer.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. peter mulholland 2nd February 2016 at 2:17 pm

    I believe they also avoid stamp duty

  2. peter mulholland 2nd February 2016 at 2:19 pm

    And capital gains tax

  3. Don’t let the taxplanning tail wag the investment dog Peter. The man from the FOS will have your guts for garters.

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