Update on CFD Leverage Regulatory Changes

By The Enforcd TeamThe Enforcd Team
In December 2016, the Financial Conduct Authority (FCA) announced their proposals to tighten the rules around selling contracts for difference (CFDs). These complex and highly leveraged financial instruments have become extremely easy for retail investors to access in recent years. This has raised concerns that consumers are not being properly informed and are therefore not adequately prepared for the risks involved.


CFDs are contracts between a trader and the provider of the product. Upon termination of the contract, the difference between the price at which the product was initiated at, and the price it was closed at, is exchanged between the two parties. When taking out the contract, a trader is able to speculate on whether the price is likely to move up or down. Whether they benefit from the price movement, or the provider does, is down to whether the market moves in their favour or against them.

A form of derivative, CFDs enable traders to gain exposure to a range of different markets, including commodities, cryptocurrencies, shares, indices, and Forex. However, many of these markets can be extremely volatile. As CFDs are highly leveraged, even with a small margin – the amount required to keep the trade open – a trader can very quickly suffer substantial losses that far exceed their margin value, if the market moves against them.

As an example, a trader can buy contracts based on the movements of FTSE100. With leverage levels of 300:1 (which is offered by many existing regulated brokers), with an initial margin of £100, clients can magnify their exposure to the market changes by up to 300 times. In this case, the value of their transaction would be around £30,000 with the outstanding amount borrowed from the provider. If the market moves against the trader by 2%, this can result in the value of their trade dropping to around £29,400, with a loss to the trader of around £600 if they have sufficient capital deposited in their account. It follows that if a trader does not adequately understand the effects of leverage, they can be devastated by such significant losses.

Online Platforms

In spite of this, CFDs have become much easier for retail clients to access. One reason for this is that the industry has seen a boom in online platforms as new technology has lowered the operating costs for providers. The FCA have granted authorisation to an increasing number of CFD providers in recent years, and firms regulated in the EEA have taken advantage of passporting arrangements to offer their services to customers within the UK. In December 2016, there were 97 FCA authorised CFD providers and 130 EEA firms operating in the UK, with an estimated 125,000 registered clients (source: FCA CP16/40). In addition to this, there are also numerous platforms that can be easily accessed by traders in the UK, but do not hold authorisation to transact such products in the UK, which adds another layer of risk to the client.

This technology made it much easier for retail traders with little experience and knowledge to have access to high risk financial instruments without adequately understanding them. As reviews by the FCA and other regulators revealed, even when investors use regulated brokers who are required to adhere to the high standards set by their regulators, there are still inherent risks for less sophisticated investors.

Reviews by Regulators

In the lead up to releasing their proposals for change in December 2016, the FCA had detected evidence of poor conduct within the industry, which was becoming an increasing concern. Even regulated firms were not adequately warning their clients of the risks, and were allowing investors to begin trading without robust appropriateness assessments, such as anti-money laundering and suitability checks (COGS 10). Their review found that 82% of clients from a sample of retail CFD providers were losing money on CFD trading, with the average loss per client equating to around £2,200.

Other regulators throughout Europe were also arriving at similar conclusions. In their 2014 study, France’s Autorité des Marchés Financiers (AMF) found that 89% of consumers were losing money, with a median loss of €1,843 and an average loss of €10,887. In 2015, the Central Bank of Ireland (CBI) found an average loss to consumers of €6,900 with 75% losing money. In a follow-up study, the figures had reduced to 74% and €2,700, but there was still a long way to go.

Regime Changes

On February 2016, the FCA issued a Dear CEO letter to CFD providers, warning them to tighten their processes around onboarding new clients. At the end of the year, the FCA released their proposals for new measures with regards to leverage, capping it at 50:1, with even lower leverage levels set for new and inexperienced clients. The directive also proposed to ban the use of bonuses to entice new clients into trading leveraged products.

Christopher Woolard, executive director of strategy and competition at the FCA, said at the time:

“We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses.

“We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products.”

In November 2016, the Cyprus Securities and Exchange Commission (CySEC) issued a circular concerning the marketing and sale of such products, which led to them prohibiting firms from offering bonuses to retail clients. In addition, firms were required to offer a maximum default leverage ratio of 50:1, which only can be exceeded if the client specifically requests it and robust appropriateness testing has been carried out.

In Australia, the Australian Securities and Investments Commission (ASIC), backed a new bill that put constraints on the use of client money for OTC derivatives.

In France and Holland, an advertising ban has been imposed on leveraged products.

The Central Bank of Ireland proposed to ban the sale of CFDs to retail customers, or at least ensure that additional measures are implemented to provide better protection, which includes limiting leverage levels to 25:1 for retail clients and negative balance protection.

In Germany, the Federal Financial Supervisory Authority (BaFin) proposed changes with regards to negative balance protection on the 8th December 2016, and subsequently imposed the rule changes.

Industry Response

Whilst many welcomed the regulatory changes with regards to negative balance protection, they have implied that changes to leverage levels could have an adverse effect on their business. They have also presented the argument that the strict controls may lead to clients seeking the leverage from unregulated brokers. Few of the primary CFD brokers in the UK have implemented a bonus ban or changes to leverage limits since the proposals were announced.

The Future for CFD Providers

The consultation period for the FCA’s CP16/40 ended on the 7th March 2017 and the regulator have specified the areas they intend to focus on going forward. These include appropriateness testing, prudential requirements, client money, financial promotions and best execution. Although no specific details have been released yet with regards to leverage, there has been speculation that a soft leverage limit may be imposed, similar to that offered by CySEC, which would allow more sophisticated investors to increase their leverage upon request.

The European Securities and Markets Authority (ESMA) released a public statement on 29th June 2017, providing an update on their position with regards to CFDs and other speculatory products. The statement confirmed that their concerns for the industry remain, and warned that the possibility of using their product intervention powers under MiFIR Article 40 is under discussion.

Measures proposed by regulatory bodies throughout Europe, including lowering leverage limits and banning financial promotions, will be taken into account. If used, these intervention measures may be applied after 3rd January 2018.


The CFD sector is in a period of transition, with many more changes looking likely to be applied within the industry in the coming months and years. Brokers who respond well to the changes, adapting their processes and controls to promote client protection are better placed survive the upheaval and lead the market forward. Whereas it seems increasingly likely that governing authorities are going to use their intervention powers to make an example of those who are not compliant with the regulatory changes.

The De Vere Group

By The Enforcd TeamThe Enforcd Team
De Vere Group

In the 2017 Finance Bill, Her Majesty’s Revenue and Customs (HMRC) proposed that:

Transfers to qualifying recognised overseas pension schemes (QROPS) requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:

·         both the individual and the QROPS are in the same country after the transfer

·         the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer

·         the QROPS is an occupational pension scheme sponsored by the individual’s employer

In response, the DeVere Group announced a strategic review. According to a statement printed by FT Adviser, at March 2017 QROPS represented approximately 20% of its business. In 2010, DeVere claimed to have advised on around a third of all QROPS transfers (since the creation of QROPS in 2006).

The DeVere Group (also styled deVere, and not to be confused with Charles de Vere, the UK independent financial advisor), is dogged by online controversy in almost all the jurisdictions they operate. Their business model is to hire advisors without industry experience, and place them wherever there are British expatriates, paying them commission only. All set up costs are met by the adviser (training, flights, and accommodation deposit). They’re also in charge of finding their own clients.

Group subsidiaries have been found by regulators to advise on products for which they lack the appropriate regulatory permissions. In 2011, the Daily Mail published an article entitled “Publish at your peril”. This set out the case of a British couple, retired to Cyprus, who were advised to invest in two Premier funds (one was compulsorily redeemed, the other was frozen, the couple lost around £60,000). It was then that they, and the journalist, found that deVere had passported its permissions from Belgium, where its license only covered insurance intermediation (not investment advice). In 2013, the Mail covered a similar case, involving four unnamed funds, a failed investment of £285k, and advice given by a Spanish office of deVere, under the same Belgian insurance license. Also in 2013, the Belgian regulator (the Financial Services Market Authority) confirmed that deVere and Partners (Belgium) ltd BVBA was included on a list of “disappeared intermediaries”.

A 2014 article by the Mail described an investment in the UAM Strategic Growth Fund (suspended in February 2013). The Mail connected the fund with United Asset Management in Valais, Switzerland: “records in Valais show that until September 2012 UAM was wholly owned by deVere boss Nigel Green.”

The client complained that that the fund did not meet their attitude to risk, and had lost a quarter of their savings. The journalist contacted deVere’s London office, and soon after the client “emailed … to say that [they] could ‘not discuss this matter any further’”.

In 2013, the South China Morning Post said “Global chief Nigel Green owned shares in several subsidiary businesses that profited from the insurance plans sold by deVere”.  The article continued:

Generali, the vendor of one insurance plan linked to the Valais fund, inserted a statement revealing Green’s position on the fund, saying: “Nigel Green, CEO of deVere Group, is a director of and holds a majority shareholding in Valais Investment Management Sarl, the fund adviser.”

Valais Investment Management and United Asset Management share the same business address, according to the commercial register of Low-Valais, which lists Frontier Holdings as the sole shareholder of United Asset Management.

Frontier is registered in Gibraltar, and it has changed its name to Titanium Advisers, according to the companies registry in Gibraltar.

The registry has no record of Green’s involvement in Frontier, but it does record that Beverley Yeomans was a director of the company from November 2009 to October last year. Yeomans is Green’s personal assistant.

Searching for references to the Strategic Growth Fund and its suspension led to a South African website named Moneyweb. This reported one side of a dispute between the South African operators of Belvedere, and deVere Group’s Nigel Green. Belvedere was covered by Offshore Alert, a newsletter published by David Marchant. The main story resides behind a $90/month paywall, but the summary is enough: “Offshore fund group Belvedere Management, which claims to have $16 billion of assets under administration, management and advisory, appears to be one of the biggest criminal financial enterprises in history, headed by David Cosgrove, Cobus Kellermann and Kenneth Maillard.”

Later, deVere Group revealed that it was behind information received by Marchant (who specialises in exposing international financial scams). In the meanwhile, Alec Hogg, writing on biznews.com explained that Belvedere (via Kellermann) was UAM’s fund manager.

In the US, deVere failed to progress a lawsuit against pissedconsumer.com (and its parent Opinion Corporation). Rather than focusing on defamation, it tried and failed to argue that Opinion Corporation’s use of the deVere trade names violated section 43(a) of the Lanham Act. UK readers should know that the US usage of “pissed” indicates dissatisfaction.

Finally in the UK, and as covered in another article, a deVere subsidiary (deVere and Partners (UK) Limited) has been required by the Financial Conduct Authority to “Immediately cease to provide third party companies with TVAS/DBAR reports or other similar report of information designed to assist third parties companies in transferring customers DB pensions to an alternative arrangement.”

The third parties may well have been other non-UK regulated group subsidiaries. And the Transfer Value Analysis (TVAS) reports might not have covered the very significant costs levied by the QROPS operator. A case of HMRC advancing the FCA’s position.

Whither next? Well, DeVere Group has just acquired a St. Lucia based private bank (Arton Bank). The Guernsey Financial Services Regulator took the firms controlling the Belvedere funds into administration, citing “systemic failings in corporate governance and the application of law, regulation, code and principle”.

And anyone reading this should suspect offshore investments delivering high returns whilst describing themselves as low risk.

The Bank of England confirms Enforcd can help best practice and compliance

By The Enforcd TeamThe Enforcd Team
Bank of England

Today the Bank of England has published its third round of Proofs of Concept (POCs) completed by its FinTech Accelerator, which includes Enforcd.

The FinTech Accelerator was set up a year ago to deploy innovative technologies on issues relevant to the Bank’s mission and operations. Working in partnership with FinTech firms the Bank is seeking to develop new approaches, build its understanding of these new technologies and support development of the sector.

As part of the FinTech Accelerator programme, the Bank of England trialled Enforcd with the aim of identifying and applying cross-cutting legal themes from regulatory enforcement actions.

The Bank Of England writes:

“We worked with Enforcd, giving a group of staff from our Regulatory Action Division (RAD) access to a cloud-based database of regulatory enforcement actions with supporting commentary and trend analysis. Having easy access to relevant published regulatory enforcement decisions can be an important input to financial firms’ overall compliance programmes.   This PoC demonstrated how technology could potentially facilitate compliance and the development of best practice in some key areas of regulation.”

Commenting on the latest POCs, Andrew Hauser, Executive Director for Banking, Payments and Financial Resilience, said:

We have learnt a great deal through these latest Proofs of Concept, both in terms of what FinTech can do, but in also in terms of how it can help us work, think and communicate differently.  The breadth of topics covered by these projects, and the Accelerator programme as a whole, shows how much central banks potentially have to gain from continued engagement with the sector in delivering their mission of monetary and financial stability. ”

Jane Walshe, CEO and Co-Founder of Enforcd said:

We felt very privileged to get such early engagement from the Bank of England and regard their work with us as a testament to the strength of our idea and vision.  We are delighted they will remain as a client.

Our roadmap for the next few months contains significant growth plans which will see us bringing in new jurisdictions,  functionality and converting the numerous proofs of concept we are engaged in to long term client relationships.

We are responding to the feedback from the Bank and have already built an API.  We are actively speaking to a number of regulators and clients in the USA and elsewhere will have a convincing transatlantic, and subsequently global, offering soon.

The full Proof of Concept report is available here .

The Perils of Discretionary Fund Managers

By The Enforcd TeamThe Enforcd Team
Discretionary Fund Maangers

Discretionary Fund Managers occupy a sort of no man’s land between independent Financial Advisors shoving their customer’s SIPPs into UCIS, and providers of those UCIS.

A trawl of the FCA Register has identified three firms which illustrate the particular perils of DFM.

Between 2008 and 2015, Norfolk based DFM Vantage Investment Group Ltd. was running a unitised fund which traded contracts for difference, and advising clients to place their money in it via their IFA, Taylor and Taylor Associates. Based on an interview with Hedge Week, in 2009, at least some of these CFDs were bets on the price of crude oil.

In November 2015, the FCA imposed a requirement upon Vantage. This required it to cease carrying out any regulated activity, sell off any derivative positions, and transfer these and any sums in the trading account to the client money account. It was told not to satisfy any client redemption requests, and forbidden from making any disbursements to shareholders and employees. It was also told to communicate the FCA’s requirements to its clients. At the time, the fund held over £4mn.

By March 2016, the Financial Services Compensation Scheme had declared the IFA in default, and paid out £3.4 mn to 119 claimants. Norfolk Constabulary charged the Taylor brothers (Alan and Russell), with 7 counts of fraud each.

In November 2016, Greyfriars Asset Management LLP was told by the FCA (in a similar requirement appended to their Register entry), to cease accepting new money into Greyfriars Asset Management Portfolio Six, and all other discretionary portfolios. They could accept redemptions, but make no other distributions.

The fund invested in ‘mini’ bonds issued by (amongst others), the Resort Group, Lanner Car Parks, and the Olmsted Series (which had a 3-5 year term). These were short-term interest bearing corporate loans. They were untraded and not covered by the Financial Services Compensation Scheme.

The Resort Group developed hotels and resorts in Cape Verde (like Stirling Mortimer), and was the focus of a BBC Panorama episode in 2016. Lanner bought parking spaces, (hints of StoreFirst, which built and sold individual storage pods), and Olmsted bought US real estate.

A 2015 client brochure touted a gross performance of between 8.3% and 12%, and gave example investments as:

URBAN STUDENT PROPERTY BOND (4-year term with semi-annual coupons paying 7% p.a.) ENVIROPARKS BOND (7-year term with quarterly coupons paying 7.73% p.a. rising to 9.73% p.a). Its purpose was developing a Waste Management site in South Wales with contracts already in existence with Local Authorities and Biffa. The money raised is being used to create a plant that will turn household waste into biofuel pellets, which can be burnt to generate electricity.

ABC IV (4-year term with annual coupons of 8.25%, paid on a quarterly basis and a bonus of 2.95% paid on maturity). Alpha Business Centres is a company offering serviced office accommodation in the UK, UAE and Malawi.

LATERAL ECO POWER (15-month term with an annual return of 8.77%). This financed the conversion of an existing coal fired power station on Anglesey, currently mothballed, into an eco-friendly, carbon neutral electricity generating plant. In the short term, waste Teak (from the furniture industry) from Africa will be imported to fuel the station being replaced by a sustainable willow forest after 3 years.

A presentation marked not for distribution, and dated January 2016, set out a number of similar investments, promoted by Greyfriars’ owners, Best international.[i] The Financial Ombudsman Service has issued a few decisions about Greyfriars, one following an introduction by IFA St James’s Place. The others involved high charges and SIPP churn, and poor inheritance tax mitigation advice.

The company behind ABC Corporate Bonds I-IV, ABC Alpha Business Centres UK Limited appointed an administrator in 2017. Its Director was listed as Bradley James Lincoln, Corporate Director at Best Asset Management Ltd, part of the same group as Greyfriars[ii]. The whole thing was operated by Alpha Business Centres LLC, out of a room in Dubai. That was owned by The Property Store in the United Arab Emirates. As with Vantage, an uncomfortably close link between the Discretionary Fund Manager, and the product provider. As Mazars, the insolvency practitioners have discovered “the Company has no physical assets and minimal funds”.[iii] £34 million was sucked out of it by Alpha using a revolving loan agreement, in exchange for debentures covered by a floating charge.

Magnificently, The Property Store provided the initial asset pool for the Lanner Car Park fund (another investment offered by Best, and held by Greyfriars Portfolio Six).

Finally, we come to Beaufort Securities Limited. It bought the assets of Hoodless Brennan, fined twice in three years by the Financial Services Authority. It too has been required to cease its DFM activities, and disburse no monies.  Internet rumours are that a fund manager was receiving commissions of 30% for investing client money with another IFA.

However even if individual fraud had not been committed, their Ombudsman Service record shows that they place their customers’ assets in AIM listed companies. For one of their clients, their DFM service generated a £71k loss. One of the selected investments was Eastbridge Investments (LSE:EBIV, suspended), an investment vehicle operated by one Greg Collier. Collier a non-executive Director of Etaireia described by Offshore Alert as an out-and-out fraud.

ISDX-listed Etaireia Investments plc (ETIP) company put out the following statement:

On 14 August 2014, Etaireia released an announcement regarding land at Bridgend Mills, Tofts, and Dalry that the Company had acquired in May 2014. The announcement stated that the Company  had  obtained additional  planning  permission  for  the site, such that  the  site  now  had  permission  for  152 residential units, an increase of 129 units. The announcement went on to say that, following  receipt of the increased planning permission, the Company had commissioned an independent report which placed an indicative value on the Bridgend Mills site of £1.3 million. 

There is in fact no planning permission currently in place at the Bridgend Mills site.

Whilst not named, http://www.ombudsman-decisions.org.uk/viewPDF.aspx?FileID=146589 (the 70k DFM loss above) referred to another investment listed on the ISDX Growth Market.

The moral of the story? Perform as much due diligence on discretionary fund managers as on the investments they put you into.

[i] http://www.creative-wealth.co.uk/wp-content/uploads/2016/03/Best-International-Jan-2016.pdf

[ii] http://trinityhi.com/media/PDF/ABC_BOND_Brochure_II_compressed.pdf

Advising on Pension Transfers

By The Enforcd TeamThe Enforcd Team
pension transfers

A cryptic Requirement on the Permission section of the FCA register record for Intelligent Pensions Ltd regarding pension transfers states:

“immediately cease to provide advice in relation to the transfer, or conversion, of safeguarded benefits under a pension scheme to flexible benefits”.

For deVere and Partners (UK) Limited, we see a similar entry:

“Immediately cease to provide third party companies with TVAS/DBAR reports or other similar report of information designed to assist third parties companies in transferring customers DB pensions to an alternative arrangement.”

The FCA places specific requirements such as this when it is concerned by the activities of a firm. In this case, both firms were involved in moving pension scheme members from direct benefit to direct contribution schemes, enabling the release of 25% tax free lump sums at the age of 55. This involved the scheme member losing any benefits associated with the final salary (direct benefit) pension.

This is the tip of the iceberg in what has been a slow-moving car crash.

The Financial Services Compensation Scheme is already groaning under the weight of claims for poor advice against insolvent independent advisors who advised their clients to invest via self-invested pension plans with high fees and high transfer commissions, in UCIS (unregulated collective investment schemes). These UCIS invested in non-UK residential developments, UK student accommodation and commercial builds. Alternatively, they invested in the life insurance policies of US citizens with terminal illnesses. Such “death bonds” would purchase policies from cancer/ AIDS sufferers and maintain the policy premiums until the death of the policy holder (at which point they hoped to take a profit between purchase price and premiums, and pay-out). Yet other UCIS pooled investor funds, and lent them to firms of solicitors, in the hope of benefitting from no-win no fee settlements, made high interest bridging loans, or lent to European SMEs at 20% interest. What links these disparate asset classes? Multiple UCIS involved in each have gone bust.

The advice to move out of a final salary pension scheme, and into a SIPP, was merely a side issue in complaints about the suitability of illiquid, unregulated, and highly speculative off-shore investments.

We’ve been here before. In 1994, the FCA’s fore-runner, the Personal Investment Authority (PIA), instituted a review of pension transfer advice, related to contracting out of SERPS (state earnings-related pension scheme, since renamed state second pension), and into an appropriate personal pension. Ultimately, 120,000 policyholders were found to have been mis-sold, and due compensation.

Now the issue is about the quality of the TVA (Transfer Value Analysis), and the provision of advice which balances a needs-based assessment of the benefits of staying in the final salary scheme, and moving to a direct contribution scheme. These include any guarantees related to inflation-linked pension income. It should also take into accounts the costs of the specific receiving scheme, including the likely expected returns of the assets and all the costs and charges, when deciding suitability.

And so, to the FCA’s latest Consultation Paper (CP), Advising on Pension Transfers (published 21 June 2017).

The FCA explains:

“The existing requirements do not specify what is intended when a pension transfer specialist checks, rather than gives, advice on the transfer or conversion of safeguarded benefits. We have seen cases where a pension transfer 12 CP17/16 Chapter 3 Financial Conduct Authority Advising on Pension Transfers specialist simply runs the Transfer Value Analysis (TVA) calculation or checks the numbers that have been produced rather than looking at the overall assessment and recommendation made as a whole. This is not in line with our expectations.”

“Even when the critical yield is determined correctly, we have concerns that firms are not properly explaining volatility and the transfer of risk to their clients”

The intent behind the CP is to place the onus for appropriate outcomes squarely on the IFA. What it seems to ignore is that firms bent on collecting 1% of a client’s pension value in exchange for transferring it into a SIPP, and then another 3% for introducing the client to a discretionary investment manager, will happily go out of business, leaving other IFAs to pay out for their poor advice to the tune of £50,000 per head (via the FSCS).

In December 2016, The FT reported a ‘Stampede to cash in ‘gold plated’ final salary company pensions’.  It reported:” transfer values have typically been offered at multiples of 30 to 40 times the projected annual pension income -and up to 50 times in some cases -achieving sums of up to several million pounds for individuals on high salaries.”

It’s easy to see why. They can take a 25% tax free lump sum (handy for paying off a mortgage, or setting up children with a decent deposit). The rest can be invested in equity to generate a dividend income.  Under recent pension reforms, can pass on any surplus to their family tax free if they die before age 75 (more generous than a survivor’s benefit of 50% of pension income).

Behavioural economics teaches us that cash now, rather than cash tomorrow, is what people want. The problem is that this insight can be exploited by the unscrupulous.  Enforcd has already discussed the Serious Fraud Office investigation into Capita Oak and others. There will be many other firms which look to divert their clients into SIPPs, and then invest their capital in UCIS which they control.

In the meanwhile, customers should beware, IFAs should undertake careful due diligence of any UCIS offering a rate of return at 6% or more, and a low risk rating, and product producers should set out the liquidity risks that attach to property yet to be constructed, and bets against medical progress. Finally, everyone should steer clear of lending to firms that banks won’t lend to.