22nd January 2018 TESTMatt Jarman

Dear CFD Broker CEO – Are your Clients really suitable?

The management of CFD (Contracts for Difference) Brokers were handed a “Dear CEO” letter on the morning of the 10th January penned by the FCA, and it made for uncomfortable reading.  The letter produced the findings of a year-long review into how CFDs are sold to customers – and its conclusions pulled no punches.  Front and centre of these concerns were shortcomings in Client categorization, and how CFD-Brokers determine whether a customer is an “elective professional”.

The letter highlights a central issue: How can a Broker judge if a customer has a reasonable understanding of the risks associated with CFD trading, based on a set of questions whose answers provide only the most basic qualitative and subjective information?  The ask from the FCA is for Brokers to dig deeper.

The point is a fair one.  According to the FCA’s study, 76% percent of retail customers lost money in the 12-month period they monitored.  Clearly something isn’t quite right, but the letter also points out that the response of many Firms has been to pull the plug on CFDs altogether.  This ‘cut and run’ approach seems a little short-sighted.  Given the widespread disruption in this market, for those that are willing to adapt in order to compete in a compliant, customer-friendly manner, the missed opportunity is significant.

Much of the press would have readers believe that taking on CFDs is the same as gambling.  That may be the case in isolation (binary options are a particular product that has caught the FCA’s attention too).  Yet when used properly, CFDs can be a useful aspect of many highly effective trading strategies.  CFDs are an excellent product for certain Clients.  The key is to identify who these Clients are, and the work required to do that is less complex than some may think.

So what’s the solution?  Allow Clients to quantitatively evidence their understanding.  Slowing down the Client acquisition and onboarding processes is not necessarily what Brokers want, but this doesn’t have to be a roadblock.  Assessing suitability through game-based, fun, quick-fire challenges, allows users to quantitatively evidence their experience.  The main point is that this format not only provides undisputable proof of client sophistication (directly addressing FCA concerns), but more interestingly it also provides a way for less experienced clients to up-skill themselves and ensure they fully understand how to use CFDs effectively.

The benefit?  Longer term Clients making stable gains and more sustainable income for Brokers.  Simply put, it’s Win, Win, Win.

If you want to learn more about our bite-sized, gamified, app-based CFD courses that can be used to assess Client suitability and awareness, then contact us at info@hyfin.com