Earlier this month, the Financial Conduct Authority showed its teeth, banning a group of firms that had been offering high risk contracts for difference (CFDs) to UK investors.
What did the firms do?
Announcing its action, the regulator said that the firms appeared to have ‘used unauthorised celebrity endorsements on social media as part of their marketing’.
Hoch Capital Ltd (trading as iTrader and tradeATF), Magnum FX (Cyprus) Ltd (trading as ET Finance), Rodeler Ltd (trading as 24option) and F1Markets Ltd (trading as Investous, StrattonMarkets and Europrime) used social media and webpages carrying fake endorsements from celebrities to entice consumers into the scams involving CFDs.
In addition to breaking rules on social media and online activity, the firms trangressed a number of other FCA regulations:
- Consumers were not provided with sufficient information as to the nature of the investments
- Some were pressured into making increasingly large investments in CFDs, which referenced bitcoin, foreign exchange, shares and indices
- Some were encouraged to take out credit to make the payments
The firms also appear not to have paid money owed to investors, to have charged customers undisclosed fees and failed to tell them about the risks of trading CFDs, which are complex investments that come with a risk of significant losses for unwary or inexperienced investors.
A number of their customers have apparently lost more than £100,000 to the schemes.
How do the firms’ actions contravene FCA regulations?
In recent years, the regulator has focused on retail consumer harm associated with the marketing, sale and distribution of CFDs and Binary Options, including issuing a Dear CEO letter in 2016.
Its ongoing work on suitability dovetails into this; high-risk investments are unlikely to be suitable for many retail customers. This is particularly the case for anyone who might be especially vulnerable.
The FCA’s Treating Customers Fairly rules are underpinned by 6 outcomes the regulator wants to see, including the need for products and services marketed and sold in the retail market to be designed to meet the needs of identified consumer groups, and for consumers to be provided with clear information and to be kept appropriately informed before, during and after the point of sale. The firms in question clearly failed here.
The firms’ use of social media marketing was another area where they fell foul of the regulator. And this isn’t just a consideration for FCA-regulated firms; the ASA and CAP, who regulate all UK advertising, have clear rules on influencer marketing. The FCA’s rules apply regardless of platform, so are equally relevant whether you’re producing a printed brochure or a tweet.
What should you be doing?
The activity of these firms is at the extreme end of the spectrum, and hopefully your financial promotions, sales and operations bear no relation to them. But for any Compliance professional, it can be helpful to revisit the rules you should be following to make sure you remain compliant:
- Ensure your financial promotions and advice are appropriate for their audience. Read our blog on improving the suitability of your firm’s advice for tips and hints, and follow our suggestions on treating vulnerable customers fairly.
- The FCA’s financial promotions rules are designed to ensure marketing and sales materials meet this need for fairness and suitability – refresh yourself on their requirements to make sure your promotions comply.
- The regulator isn’t afraid to challenge unfair or unclear promotions, including banning them or giving out significant fines for firms issuing misleading promotions. You need to keep a tight rein on your promotions production process to ensure that all FPs follow the rules and are subject to the required Compliance team approvals process. Regulated firms are increasingly finding that introducing an element of automation to reviews and approvals can help bring additional rigour here.
- Make sure you understand the rules around disclaimers and disclosures; ensure your small print manages customer expectations.
- Brush up on the rules around compliant social media use.
- If you feel that you need to get more control over your financial promotions, our blog has tips.
What does the FCA action mean for the firms in question?
The orders require 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 Cypriot-regulated firms – which were permitted to operate in the UK through a method known as passporting – must now cease all regulated activities with UK consumers. This represents the first time the FCA has used its power to remove passporting rights from a firm.
Ensure your financial promotions meet FCA requirements
If you want to ensure that your financial promotions don’t attract attention from the regulator for the wrong reasons, you can download a copy of our Financial Promotions Checklist for Compliance.
The checklist covers the five key stages to producing financial promotions, during which the process and documented approvals can be as important as the end result. It’s a valuable resource for any Compliance professional; you can get your copy in our resource library.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.