The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko has censured CTRL Investments Limited for contravening the conditions of its derivatives issuer (DI) licence.
Through its ongoing monitoring of the DI sector, the FMA was satisfied that CTRL had materially contravened two standard conditions of its licence by failing to comply with requirements for certain outsourcing arrangements and allowing clients who did not understand derivatives and associated risks, to trade.
Client suitability checks
Licensed DI’s must ask retail investors to provide information about their knowledge, experience and level of understanding of the relevant type of derivative to enable the DI to assess whether the derivative is suitable for the individual. If an investor does not have the ability to understand, the DI must not enter into the derivative with the client.
James Greig, FMA Director of Supervision, said: “CTRL was screening retail investors for their understanding of derivatives, however in some circumstances if a client could not demonstrate the necessary skills and knowledge, CTRL merely provided a warning statement and suggested the client not continue. The warning statement itself confirmed CTRL’s view that the client did not understand the derivative.
“Insufficient client suitability checks continue to be a problem we are seeing among the derivatives sector, and we will continue to press the industry to improve. We have little tolerance for non-compliance, as derivatives are high-risk financial products and trading them isn’t suitable for most retail investors.”
Outsourcing
A licensed DI that chooses to outsource essential processes or systems must be satisfied the third-party provider can perform the service to the standard required to enable the DI to meet its licence obligations. The DI must also have a legally binding agreement with the provider.
Mr Greig said: “CTRL had outsourced its account management, sales and onboarding functions to a third-party provider, but could not demonstrate why it was satisfied the provider was capable of providing the services, or that there was a legally binding agreement relating to CTRL’s New Zealand operations.
“Outsourcing is an area we have previously expressed concern about – we found it was a medium-high risk area in our 2020 derivatives sector risk assessment. DI’s must have proper legal arrangements with third-party providers, including provisions that enable effective performance monitoring. This a fundamental obligation.”
To remedy the issues relating to client suitability checks and avoid future contraventions, the FMA has required CTRL to develop and carry out an action plan, which must be approved by the FMA.
The FMA acknowledges that CTRL has co-operated throughout the process.
CTRL offers clients access to Contracts for Difference (CFDs) on a variety of underlying assets.
New Zealand has 25 licensed derivatives issuers, which have an estimated 23,000 retail customers.
The censure was issued under section 414(2) of the Financial Markets Conduct Act, which allows the FMA to censure a licensed firm and require an action plan if the FMA is satisfied a business has materially contravened its obligations.
