TheChek News Flow

Market turmoil increases dangers in highly-leveraged products

The UK financial watchdog has warned it will crack down on companies offering a highly-leveraged investment product to retail customers if they breach marketing and selling rules. 

In a letter on Thursday, the Financial Conduct Authority raised concerns over a “significant minority” of contract for difference (CFD) brokers undertaking pressure selling, charging inappropriate fees and refusing to process withdrawals.

CFDs are a type of equity derivative which allow investors to profit from price movements without owning an underlying asset. Investors bet on whether the value of an asset will rise or fall, agreeing to pay the difference across a set period. 

Financial companies can only offer CFDs to appropriately experienced retail investors. With recent market volatility increasing the risks, the FCA has, in effect, restated previous warnings as it attempts to strike a balance between encouraging investment and preventing novice traders from gambling away their savings.

“CFD providers authorised in our regime must sell products appropriately,” said Sarah Pritchard, FCA executive director of markets. “When the new consumer duty comes into effect, [providers] will need to ensure that products deliver good outcomes for retail consumers.” 

The FCA estimates 80 per cent of customers lose money on CFDs. Regulators first cracked down on the sale and marketing of products to retail clients three years ago. 

It forced brokers to limit the leverage they offered investors to a maximum of 30:1, with more stringent controls put in place for volatile assets. CFDs had grown in popularity due to the chance of significant returns and a range of bonuses offered to investors by platforms.

Providers were also required to close a customer’s position when funds fell significantly, while providing protections to ensure they could not lose more than the total they had initially invested. 

“This sector is for people who have passed an appropriateness test and want to deal in leverage,” said Ben Williams, an analyst at Shore Capital. “It’s a question of whether the regulator decides an industry with 70 per cent loss ratios is necessarily a bad outcome.” 

The FCA has pointed to “inherent conflicts of interest” that exist in trades, particularly when platforms profit from client losses by under-hedging an investment. It argues current market volatility could be misrepresented as an opportunity for more frequent trades. 

In 2020 and 2021, the regulator stopped 24 firms marketing CFDs in the UK; it estimates measures prevented £100mn in harm last year alone. 

Warnings were issued a day after the FCA set out its plans for a “simplified financial advice regime” as it seeks to encourage more people with savings to invest in “mainstream products” such as stocks and shares Isas. 

Proposals are intended to make it easier for people to seek financial advice by spreading payments, while encouraging lower fees through simplifying paperwork and reducing certain qualification requirements. 

From July next year, companies will operate under new consumer duty requirements, obliging providers to ensure clients understand the services they seek.

Traders say FCA-approved platforms selling CFDs — including larger operators such as IG Group, CMC Markets and Plus500 — will need to ensure investors understand the risks associated with the products.

IG Group said the company fully supported the FCA’s aims to “uphold high conduct standards”. CMC Markets and Plus500 did not provide comment. 

Implosion of Sam Bankman-Fried’s FTX has sent shockwaves through industry

Cryptocurrency investors in AAX are searching for senior executives of the exchange after its decision last month to halt withdrawals triggered a backlash among users.

The Hong Kong-headquartered crypto exchange, which once boasted 2mn users, announced with great fanfare in 2019 that it was the first digital asset exchange to use the London Stock Exchange’s trading technology.

But AAX, which stands for Atom Asset Exchange, halted customer withdrawals on November 13 for what it called temporary “scheduled maintenance” to “address serious vulnerabilities”. Employees at the exchange alleged the outage was caused by liquidity problems.

The search, conducted by thousands of users through multiple Telegram messaging groups, underscores the increasing desperation of investors in the unregulated industry. According to AAX users, the exchange has since failed to process customer withdrawals, and staff told the Financial Times they had been disconnected from the company’s email systems.

The Hong Kong Monetary Authority, the city’s financial regulator, said the exchange did not fall under its purview, while the Securities and Futures Commission said it did not comment on individual cases. AAX is not one of the SFC’s few licensed virtual asset trading platforms.

Hong Kong is a crypto hub, housing offices of several groups, including Sam Bankman-Fried’s FTX exchange and his crypto trading company Alameda. Just before FTX’s collapse, Hong Kong had signalled plans to legalise retail trading of crypto assets.

AAX vice-president Ben Caselin said on Twitter he resigned on November 28, citing a loss of trust in management. Caselin, one of the AAX executives users are searching for to recover their funds, told the FT he was unable to help.

He characterised his previous role as a “spokesperson” who was uninvolved in the company’s financials. Caselin added he “felt very unsafe” in Hong Kong but declined to confirm his location.

After withdrawals were paused, AAX users set up Telegram groups to exchange information and posted leaked pictures of senior executives’ personal identity documents to try and establish their whereabouts.

“I started to notice there was something suspicious behind all this, so I did my own investigation,” said Mike Ong, a Singaporean financial executive who is part of the groups. “In that period when they said they were doing maintenance, a lot of core management started to delete their online presence.”

In November, AAX users visited the Hong Kong offices only to find them deserted. Ong visited the exchange’s Singapore co-working space but there were no employees working. The Telegram groups now have thousands of members, including former staff members who still have money on the exchange.

Some employees were subsequently told by management that several large cryptocurrency holders pulled their funds from the exchange in the wake of the FTX crisis. Their access to the company’s email and Slack channels have since been disconnected.

AAX did not respond to a request for comment.

Users are specifically attempting to contact Victor Su, one of the exchange’s main investors considered a senior executive, who was previously based in Hong Kong.

Su refused to reveal his location to the FT and threatened legal action over “unrealistic reports” that had been published against him.

“I have not, and I will not [abscond], I believe that the law will give the best answer,” Su wrote in a text message on Wednesday. “I am also an investor, and I have lost a lot in it.” He did not elaborate further.

“We will continue to pressure the senior executives through our [Telegram] groups,” said one organiser of the user investigation. The groups have also been attempting to report concerns to police in Singapore, Taiwan and Hong Kong, but Caselin said such efforts were futile.

“Some people have asked me why I am not filing for a report with the Hong Kong police,” he wrote on Twitter. “First off, AAX is a Seychelles-based exchange despite AAX’s roots in Hong Kong, so it’s useless.”

Joint venture plans to turn some shops and other properties into houses

John Lewis has teamed up with investment manager Abrdn in a £500mn multi-decade deal to build 1,000 rental homes, becoming the first British retailer to turn some of its shops and other properties into houses.

The employee-owned partnership, which said in June that it wanted to get into housebuilding, plans to build the properties in Bromley and West Ealing in London, and in Reading.

John Lewis will develop and manage the homes, using its property assets, in the first tranche of a 10,000-home plan over the next decade. The company earlier said it would use two Waitrose supermarkets and a former collection depot for redevelopment.

“This is a long-term joint venture that brings together Abrdn’s experience as one of Europe’s largest residential investment managers together with the trust, service and quality synonymous with the John Lewis and Waitrose brands,” the group said on Friday.

The deal includes a commitment to affordable housing and sustainability, John Lewis said, with the aim of providing a “stable income” for the partnership as it seeks to diversify from retail.

Abrdn and John Lewis will unveil more details for West Ealing and Bromley “in due course” and aim to submit their first planning applications next year, said Neil Slater, head of real assets at the investment manager.

A public consultation for the site in Reading is expected in 2023.

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A Justice Department official overseeing FTX’s bankruptcy said the crypto platform’s collapse is likely the ‘fastest big corporate failure in American history’

A U.S. Justice Department bankruptcy watchdog called for an independent investigation into FTX’s collapse, comparing the cryptocurrency platform’s sudden failure to the fall of Lehman Brothers.

U.S. Trustee Andrew Vara, an official at the Justice Department unit monitoring bankruptcy courts, asked the judge overseeing FTX’s chapter 11 case to appoint an independent examiner to provide a transparent account of FTX’s failure because of the wider implications the exchange’s collapse has on the crypto industry.

FTX’s collapse “is likely the fastest big corporate failure in American history,” Mr. Vara said, saying the platform suffered an astonishing loss in value from a market high of $32 billion earlier this year to bankruptcy.

Mr. Vara said an examiner is necessary to investigate “the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement” at FTX and circumstances around its collapse.

Mr. Vara also said an examiner should review whether any viable legal claims exist to remedy losses of FTX customers. He said reports produced by the examiner appointed in the bankruptcies of Lehman and subprime lender New Century Financial “stand as examples of the bankruptcy system serving the public interest in transparency and accountability.”

“These cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the debtors’ extraordinary collapse,” Mr. Vara said.

FTX founder and former chief executive Sam Bankman-Fried said this week that he didn’t intend to commit any fraud or use customer funds to back leveraged bets at Alameda Research, a cryptocurrency hedge fund attached to FTX. Mr. Bankman-Fried also said he wants to assist government regulators in an attempt to make customers whole.

“We welcome the investigation by the examiner and hope the investigation encompasses not only the role of management, but all parties including the role of outside professionals,” Mr. Bankman-Fried’s spokesman said Thursday.

Mr. Vara’s request for an examiner must be approved by Judge John Dorsey of the U.S. Bankruptcy Court in Delaware.

Independent examiners are more common in large chapter 11 cases when borrowers or corporate insiders are accused of misconduct. A judge appointed an examiner for bankrupt crypto lender Celsius Network LLC in September, following a request by the U.S. Trustee.

Mr. Vara praised the work done so far by FTX’s new chief executive, John J. Ray III, and bankruptcy advisers to untangle the company’s affairs but said the “questions at stake here are simply too large and too important to be left to an internal investigation.”

An independent examiner could also benefit Mr. Ray by freeing him up to manage FTX’s operations while an investigation into prior management is conducted, he added.

FTX couldn’t immediately be reached for comment. Mr. Ray, who helped unwind Enron after the energy company filed for chapter 11, has said in court papers on behalf of FTX that he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”