Compliance
The first supervisory Notice issue to F .1 Markets ltd
Abstract
The article analyses the enforcement actions taken by the Financial Conduct Authority against a financial Firm F.1 Market for a violation related to Article 24, M.I.F.I.D. concerns general principles and information to clients.
The Firm was offering C.F.D.s, complex financial derivative products, allowing investors to trade short-term positions and commodities products.
The Financial Conduct Authority in force of article 196 Financial Services and Markets Act 2000 within the First supervision notice has imposed to the Firm to:
- not conduct any regulated activities
- not do any marketing activity to a person resident in the United Kingdom
- close all open trading positions
- liquidate all the positions related to UK clients, by 11 June 2020.
- notify all clients in the UK that the Firm cannot operate anymore by 4 June 2020
- display on all its website that is not permitted to provide regulated financial services to residents of the United Kingdom
- display on all its trading platform that is not allowed to offer coordinated financial services to residents of the United Kingdom
- not dispose of any amount without the written consent of the Financial Conduct Authority, if any payments are made to any account.
In conclusion, the author extracts the best practice applicable to avoid enforcement actions.
1. Fact
2. Regulation landscape
3. The violation
4. The supervisory notice procedure
5. Best practices
1. Fact
The Firm registered in Cyprus was operating primarily through websites:
and was offering CFDs, a complex financial derivative product.
The Contract for Differences C.F.D. is a financial contract that pays the differences in the settlement price between open and closing trades.
Those contracts allow investors to trade the direction of securities over the very short-term and are especially popular in F.X. and commodities products.
Unlikely other Firm, this one was advertising its product in the market within modalities not-conform to the principal regulations, utilising inappropriate messages through its website like:
- “get your trading groove on with Stratton. Do you want to trade hassle-free? Sure, you do. Go ahead and open your Stratton trading account and get the trading groove on. We have got all the CFDs covered too. From Forex to commodities and everything in between”
- “Trade CFDs at investous. Investous offers CFD trading on a wide array of different asssets. Choose to trade from over 270 Financial instruments, across 4 different asset classes, Forex (F.X.), stocks, Indices and Commodities, all available on our trading platform!”
- “trade with power! Rely on our wide array of expertise, advanced tools and modular platforms.”
All those communications represent a violation of the regulations described below.
2. The regulatory landscape
The Firm authorised since 2015 as an investment firm with Cyprus Securities and Exchange Commission, in 2016 have obtained permission to conduct cross-border services to the UK under M.I.F.I.D. legislation for investment services involving financial C.F.D.s.
Under this regime, the Firm must comply with the conduct of business requirements of M.I.F.I.D., as transposed into Cypriot law.
When it comes to clients’ communication, the Firm must adhere to Article 24 of M.I.F.I.D., which concerns general principles on how to inform clients.
The article requires that,
- when providing investment or ancillary services, investment firms act honestly fairly and professionally following the best interests of their clients.
- Investment firms assess the compatibility of the financial instruments with the needs of the clients to whom they provide investment services and ensure that the financial instruments are offered or recommended only when this is in the interest of the client.
- All information, including marketing communications, addressed by investment firms to clients or potential clients shall be “fair, clear and not misleading.” It also requires marketing communications to be identifiable as such.
- All information about investment and its services must be communicated in good time to clients or potential clients, the financial instruments and proposed investment strategies, execution venues, and all costs and related charges.
- Requires that the information in paragraph 24.4 shall be provided in a comprehensible form in such a manner that clients or potential clients can understand the nature and risks of the investment service, and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis.
Furthermore, under the terms of M.I.F.I.D., investment firms must assess the compatibility of the financial instruments with the needs of their clients, and ensure that the financial instruments are offered or recommended only when this is in the interest of the client.
Instead, the company marketing material was not fair, not clear, and misleading.
3. The Violation
The Authority stated that the Firm has failed to carry out appropriate assessments of the compatibility of its products with its customers, and it has engaged in highly inappropriate sales practices.
To reach this conclusion, the Financial Conduct Authority analysed 68 customers complaints, expressing concern about the Firm, for a period from 9 October 2018 to May 2020.
Clients complaints were related to:
- Misleading advertisement
- Aggressive selling technique
- Unscrupulous advice
- Resistance on withdrawing the funds
- Unjustified fees
- Substantial financial loss
However, the final supervisory notice has been served after careful evaluation.
At first instance, the Authority has notified the Cyprus Security Exchange Commission (CySEC) of the situation, expecting them to take some action.
In the absence of response or action, the Authority has informed CySEC of its intention to exercise the power of intervention, accordingly, with article 196 -197 Financial Services and Markets Act 2000, applying the restrictive measure of
- not conduct any regulated activities
- not conduct any marketing activity to a person resident in the United Kingdom
- close all open trading positions
- liquidate all the positions related to UK clients, by 11 June 2020.
- notify all clients in the UK that the Firm cannot operate anymore by 4 June 2020
- display on all its website that is not permitted to provide regulated financial services to residents of the United Kingdom
- display on all its trading platform that is not allowed to provide regulated financial services to residents of the United Kingdom
- not dispose of any amount without the written consent of the Financial Conduct Authority, if any payments are made to any account.
4. The supervisory notice procedure
The procedure state in the Financial Service and Markets Act 2000 allow the firm ex. Article 197 to make oral argument or take actions in front of the competent Authority, in defence of a supervisory notice that requires a regulated firm to do something or not to do something.
Unlike a warning notice or decision notice, the action set out in a supervisory notice can take effect immediately or on a date set out in the notice (in this case, 18 June).
The Firm has then a minimum of 14 days to respond to a first supervisory notice or, take it to Court by referring it to the Upper Tribunal within 28 days of receiving it.
The Upper Tribunal has the power to suspend the effect of a supervisory notice.
5. Best practice
The first supervision notice elevates against the Firm also contain an indication about what must be considered best practice.
The Firm should ensure that:
- its marketing communications are fair, clear, and not misleading
- assess the compatibility of the financial instruments with the needs of the clients to whom the Firm provides investment services
- provide appropriate information in good time to clients or potential clients regarding the Firm and its services
- act honestly, fairly, and professionally following the best interests of its clients
- disclose its fee schedule in an understandable form such that clients are reasonably able to understand the nature and risks of the investment services.
- In practice, a compliance department has to put in place a procedure that allows anyone to create and distribute financial marketing material to be aware of the regulatory requirements.
A second step is to create an authorisation procedure within the opportunity to escalate the most controversial material to a different department, compliance, or a panel of senior managers.
Established the procedure is mandatory to embrace it into a proper policy that must be distributed to the marketing department, maintained updated and, contained process to receive complaint from customer.
Finally, the compliance department must maintain the record of all the material approved, mandatory for the financial information to complain within M.I.F.I.D. regulations.
The Financial conduct authority publishes every year's guidance and material to inform and update the corporate department in the UK and Europe.
Still, it remains fundamental to adhere to the COBS 4 principles “Communicating with clients, including financial promotions.” .
June 2020
by Daniele Lupi