The Financial Conduct Authority has fined foreign exchange trader FXCM UK £4 million for making 'unfair profits' and not being open with the FCA.
Following the fine, the FCA has announced that it will conduct 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.
FXCM UK 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.
The Financial Conduct Authority punished Forex Capital Markets Ltd and FXCM Securities Ltd ("FXCM UK") with a £4m fine for allowing the US-based FXCM Group to withhold profits worth approximately £6m 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 says it 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."
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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.
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.