The Financial Conduct Authority (FCA) has fined Forex Capital Markets Ltd and FXCM Securities Ltd (“FXCM UK”) £4,000,000 for allowing the US based FXCM Group to withhold profits worth approximately £6 million ($9,941,970) that should have been passed on to FXCM UK’s clients.
FXCM UK also failed to tell the FCA that the US authorities were investigating another part of the FXCM Group for the same misconduct. The FCA has ensured that FXCM UK’s clients will be fully compensated, with credit automatically paid to their accounts. David Lawton, the FCA's director of markets, said:
“When consumers lose out because of poor conduct it undermines confidence in the integrity of our markets. The FCA will use all the tools at its disposal – supervision, rule-making and enforcement – to ensure that firms do not exploit conflicts of interest or the trust placed in them by their clients.”
Tracey McDermott, the FCA’s director of enforcement and financial crime, said:
“Not only did FXCM UK fail to treat its customers fairly or correctly apply our rules, I am particularly disappointed that it was not transparent in its dealings with the FCA. We expect all firms to put customers at the heart of their business, and we have taken action to ensure clients of FXCM UK will get redress.”
FXCM UK placed ‘over the counter’ foreign exchange transactions known as rolling spot forex contracts on behalf of retail clients, which were then executed by another part of the FXCM Group. Between August 2006 and December 2010, the FXCM Group kept profits from favourable market movements between the time the orders were placed by FXCM UK and executed by the FXCM Group, while any losses were passed on to clients in full – a practice known as asymmetric price slippage.
FXCM UK also failed to check that its order execution systems were effective, and whether its order execution polices complied with the FCA’s rules on best execution.
These rules require firms to take reasonable steps to secure the best possible deal for their clients. The FCA also expects firms to treat their customers fairly (FCA principle 6) – FXCM UK fell short of both of these standards.
In July 2010, the US authorities launched an investigation into FXCM’s business in the US. Although senior managers of the FXCM Group sat on the Board of FXCM UK and knew about the investigation, FXCM UK failed to alert the FCA. This breached the FCA’s requirement that firms are open and cooperative with the regulator (FCA principle 11).
Once it became aware of the investigation in August 2011, the FCA stepped in to review FXCM UK and secure redress for affected consumers.
The FCA is conducting a thematic review of firms’ execution practices, including the way services are described to clients and arrangements for order execution and review. The FCA expects to publish the results by the end of Q2 2014.
Notes for editors
- Final notice for Forex Capital Markets Limited (“FXCM Ltd”), FXCM Securities Limited (“FXCM Securities”)[1].
- The FCA expects firms to take reasonable steps to obtain the best possible results for retail and professional clients when executing orders on their behalf (‘best execution’). The FCA highlighted these rules in the most recent edition of Market Watch[2], and is undertaking a thematic review of best execution across a number of markets.
- Forex markets are ‘over the counter (OTC)’ – based on bilateral transactions between counterparties in the market. This means end-clients rely heavily on the price quoted by the counterparty acting on their behalf. In addition, once opened, contracts cannot be transferred between firms. As a result, clients cannot shop around once they have traded, even if they think that they can get a better result elsewhere.
- Rolling spot foreign exchange transactions are:
- contracts to buy or sell foreign exchange where prices are agreed but payment is made later, or
- contracts where the profit made or loss avoided depends on changes in the exchange rate (known as ‘contracts for difference’).
- The relevant FCA principles for business:
- A firm must pay due regard to the interests of its customers and treat them fairly (customer interest - principle 6)
- A firm must deal with regulators in an open and cooperative way, and must disclose to the FCA appropriately anything related to the firm of which the FCA would reasonably expect notice (relations with regulators – principle 11).
- FXCM UK’s customers who lost more than $1 as a result of the firms’ execution practices will have their accounts credited within 60 days. FXCM UK will contact customers who no longer hold an account to notify them that their accounts have been temporarily reopened for these purposes.
- Any unclaimed funds will be passed to the FCA in addition to the fine. Once the FCA has recovered the costs related to enforcement cases, the balance is passed to HM Treasury.
- FXCM UK agreed to settle at an early stage of the FCA’s investigation, qualifying for a 20% discount. Without the discount, the total fine would have been £5,000,000.
- This enforcement action is unrelated the FCA’s ongoing investigation into trading on the foreign exchange market.
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.