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FCA publish a Final Notice in relation to Cypriot CFD firm failing to treat customers fairly
On 14 August 2024, the FCA published a Final Notice in relation to Cypriot contract for differences ("CFD") firm, Forex TB Limited ("FXTB"), imposing a fine of £276,100 for failing to treat its customers fairly, and for providing investment advice without being authorised to do so. The FCA would have imposed a fine of £1.215 million, but FXTB demonstrated that this would cause it serious financial hardship.
FXTB is a Cypriot firm which markets CFDs through an online platform accessed through its websites, www.forextb.com and www.patronfx.com. The Notice highlights that CFDs are complex financial derivative products which are used to speculate on the movement in prices on a wide range of assets. The FCA say they "frequently involve high levels of leverage which creates the risk of substantial losses in the event of even small adverse price fluctuations in the underlying assets." Due to those risks, the FCA also refer to their specific restrictions on the marketing and sale of CFDs to retail consumers (“Product Intervention Measures”).
FXTB conducted matched principal trading, executing trades as counterparty with its clients but simultaneously entered into matching trades with a liquidity provider. This meant that it was not exposed to market risk and earned its revenue through commission, fees or charges on transactions. It was therefore in FXTB’s interests to induce customers to trade CFDs through its platform. It was passported into UK up to Brexit and relied on the Temporary Permission Regime ("TPR") from January 2021.
As at 31 December 2020, FXTB had 1,833 UK-based client accounts. From the inception of the TPR on 1 January 2021 until 5 April 2021, FXTB opened 2,477 accounts relating to UK-resident consumers. For UK resident-consumers who deposited to their accounts in that period, the total loss experienced was approximately £4.4 million.
The FCA "required" FXTB to cease providing services to UK consumers in April 2021 under a voluntary requirement ("VREQ"). Prior to that point, FXTB marketed its products online. Customers who clicked on advertisements were directed to an application form and subsequently contacted by a member of FXTB’s staff, frequently referred to as an “Account Manager”. The Account Managers presented themselves as experienced financial professionals who were assigned by FXTB to assist the customer and to work in the customer’s best interests, mostly by telephone.
FXTB’s customers were frequently inexperienced in trading and did not always understand the significant risks attached to trading CFDs. Some customers were unaware of, or confused over, the nature of the products offered by FXTB, indicating that Account Managers failed to provide a sufficiently clear explanation of the nature and features of CFDs. Some customers did not know what margin was, or what margin trading involved.
The Notice states that rather than ensuring that the relevant risks were fully and clearly explained and that customers did not trade CFDs unless they were willing to lose a significant part of, or all, their investment, Account Managers frequently exploited their position as a trusted and apparently experienced professional adviser, using various devices to encourage customers to trade through FXTB without any, or any adequate, explanation of the risks of doing so.
This included encouraging customers to deposit additional funds, either on the basis that they would "miss out" on profits, or that additional funds were needed to maintain open trades/maintain their margin.
The FCA Notice states "Given the significant risks attached to trading CFDs, the Authority considers that there are unlikely to be circumstances when it would be appropriate for a CFD provider actively to encourage, let alone to put pressure on, customers to deposit additional funds for the purposes of trading CFDs."
Some customers were encouraged to deposit further funds on the basis that their initial deposit had made a profit. In other cases, Account Managers encouraged customers to deposit further funds on the promise of large profits. The encouragement often amounted to improper pressure, including the use of frequent and persistent calls and continued suggestions to deposit further funds even where the customer had clearly informed the Account Manager that they could not afford to.
On occasions, Account Managers encouraged customers to borrow money from friends or family, or to obtain finance. The Final Notice states "Given the risks involved with trading CFDs, and the strong possibility of losing money, there are unlikely to be any circumstances in which a CFD provider would be justified in advising its customers to obtain credit to invest in CFDs".
Customers were also pressured to deposit funds as a means of recovering losses. The FCA's Notice asserts that the combined use of pressure, with the promise of unrealistic returns, was a clear failure by FXTB to treat its customers fairly.
Account Managers also frequently provided customers with advice on specific trades, despite FXTB having no permission to provide investment advice. This advice often amounted to directions on which trades to make. Account Managers relied on the trust their customers placed in them to induce them to enter into trades.
In some instances, Account Managers advised customers not to use risk management tools such as stop-loss orders.
Account Managers had additionally frequently encouraged customers to apply for "Elective Professional Client" ("EPC") status, meaning the FCA's Product Intervention Measures did not apply. In particular, this meant they could trade using higher leverage than retail clients. Firms can only categorise customers as EPCs where they have assessed the customer’s expertise, experience and knowledge and where the customer meets certain criteria relating to experience and size of investment portfolio. While FXTB’s Client Categorisation Policy appropriately identified these criteria, FXTB frequently encouraged customers to apply for EPC status without any reasonable basis for considering the customer to have sufficient expertise, experience and knowledge and conducted assessments improperly. This included providing customers with the answers to tests and encouraging them to provide false information. In one case, "to pass the test in order to "qualify", [the Account Manager] gave me all the answers to the test.” Some customers failed the assessment multiple times, resulting in their Account Manager intervening to help them pass. In a number of cases, customers explained that they had expressly stated to FXTB that they did not have investment knowledge or experience.
Account Managers did not pay due regard to the interests of customers or treat them fairly when they pressured retail clients to apply for EPC status in circumstances where these customers clearly did not have sufficient experience, expertise and knowledge in CFDs.
The FCA concluded that FXTB breached Principle 6 of the Principles for Businesses by failing to pay due regard to the interests of its customers and treat them fairly. In particular:
- FXTB failed to ensure that its customers were provided with clear information on the nature of CFDs and the risks attached with trading them;
- FXTB failed to ensure that its customers had the necessary experience and knowledge to understand the risks involved in trading CFDs;
- FXTB enabled its Account Managers to use their positions, apparently as knowledgeable and experienced financial professionals acting on behalf of the customers, to exert improper influence on customers to trade CFDs using FXTB;
- FXTB improperly encouraged customers to deposit additional funds for the purposes of trading CFDs; this encouragement included the use of improper pressure to deposit funds, including encouraged them to borrow money from friends or family or to seek finance; given the risks of trading CFDs and the likelihood of the customers losing money, such encouragement should never have been provided;
- FXTB provided advice to customers on specific CFD trades to make in order to encourage them to trade CFDs using FXTB;
- FXTB improperly encouraged customers to apply for re-categorisation as EP clients, despite having no reasonable basis for considering that they met the criteria for such a categorisation. It also failed to conduct assessments appropriately, including, variously, Account Managers providing customers with the answers to assessments and encouraging them to provide information which the Account Managers knew to be false; and
- By re-categorising customers as EPCs improperly, FXTB unfairly deprived those customers of the protections provided by the Product Intervention Measures.
In addition, FXTB carried on a regulated activity without permission. It did not have permission to advise on investments, including CFDs. Despite this, on numerous occasions, FXTB’s Account Managers provided its customers with advice, instruction and/or direction on the opening, closing and management of CFDs entered into with FXTB. This advice amounted to personal recommendations
As a result of this misconduct, UK-resident consumers who deposited to their accounts during the relevant period, the total loss experienced during January to April 2021 was £4,426,023.
The FCA considered FXTB’s misconduct to have been particularly egregious since it relied upon the exploitation of customers who, because of their inexperience, were vulnerable.
The FCA Notice indicates that in relation to the period from 1 January 2021 to 12 April 2021, the sums paid out by FXTB as compensation to affected UK consumers exceeded the revenues earned by FXTB in relation to UK consumers.
Our thoughts
The misconduct identified was serious and widespread. While we doubt many other CFD providers would engage in these behaviours, it may be worthwhile using this as a means to test their own safeguards, in particular as we enter the second year on the imposition of the Consumer Duty (notably not in force at the relevant time). Customer classification is often a risk area and one where the application on a day-to-day basis should be kept under close scrutiny.
Author
David Capps, partner