The FCA’s recent Dear CEO letter about contracts for difference (CFDs) - see link - makes depressing reading for firms and regulators alike.
It’s a letter that could have been written at any time in the last 20 years. And while CFDs have their own particular risk profile, there is nothing particular about the findings of the FCA review, which are potentially relevant to firms across the industry.
Here’s a brief look at two of the (eight) areas of weakness the FCA highlights (they're all worth a look), both of which are at the root of multiple conduct failings over the years:
Target market identification: Perhaps the most obvious historical example of failing to do this was the selling of PPI to self-employed consumers who were ineligible to claim. A slightly less well known case is interest rate swaps, the target market for which was gradually expanded by several firms at the same time as the changing economic situation was making the product less valid. Suitability – matching products and services to consumers' needs - is at the heart of good conduct, and becomes all the more critical when selling relatively complex products, such as CFDs, into the retail market.
Conflicts of interest: There is a good argument that managing conflicts of interest effectively – e.g. between borrower and lender, or firm and customer – is a large part of what the financial services industry is about. So maybe it shouldn’t be a surprise to see it highlighted again as an area of weakness – if it was easy, the industry would look very different. Yet the finding that all the firms reviewed had problems here should raise a flag for firms elsewhere to examine their own arrangements.
There is a tendency in a good few firms, across sectors, to see conduct risk in slightly transactional terms – it needed fixing but now only needs maintaining. The reality is surely messier, with multiple overlapping cycles of identifying and correcting problems (hopefully early) as the economy, firms and their products, and consumer needs all constantly evolve. Whatever sector you’re in, getting the checks and balances right will never be easy, getting too close to them a recipe for myopia.
For regulators, the message is equally stark, that the drivers of conduct risk have not become noticeably weaker, despite all the regulation aiming at controlling and weakening them. Take a look at old editions of the FSA/FCA’s variously named Financial/Conduct Risk Outlook to see how little has changed.
There is surely also a “wood for trees” debate here - whether the increasing detail of regulation, often spurred by the industry’s wish for greater certainty and predictability, has become a problem in itself, a distraction for both firms and regulators.
Following the conclusion of a project that assessed whether CFD providers and distributors deliver the CFD product to the intended target market, pay due regard to the interests of customers and treat them fairly, we have published a Dear CEO letter