FINAL NOTICE

To:

ACCENDO MARKETS LIMITED

Firm Ref:

475285


1.
ACTION

1.1.
For the reasons listed below and pursuant to section 206 of the Financial Services

and Markets Act 2000 (the “Act”), the FSA hereby imposes a financial penalty of

£56,000 on Accendo Markets Limited (“Accendo”/the "Firm”). This penalty is in

respect of breaches of Principles 3 and 9 of the FSA’s Principles for Businesses (the

“Principles”) during the period between 7 January 2008 and 1 October 2010 (“the

Relevant Period”).

1.2.
Accendo agreed to settle at an early stage of the FSA's investigation and has

therefore qualified for a 20% (Stage 2) discount under the FSA's executive

settlement procedures. The FSA would have otherwise sought to impose a financial

penalty of £70,000 on Accendo.

2.
SUMMARY OF REASONS

2.1.
The FSA has imposed a financial penalty on the basis of the facts and matters

described in more detail in section 4, below. These failings relate to advice given by

Accendo in respect of Contracts for Differences (“CFDs”) during the Relevant

2.2.
Specifically, during the Relevant Period, in relation to the advisory sale of CFDs,

Accendo failed to:

(1)
take reasonable care to organise and control its affairs responsibly and

effectively, with adequate risk management systems, in breach of Principle 3,

in that it:

(a)
appointed brokers who did not hold the prescribed qualification;

(b)
failed to distinguish between execution-only and advisory trades; and

(c)
did not have a robust compliance monitoring programme in place as

call monitoring was limited to a sample review of less than 10% of all

calls and the Firm’s call monitoring template lacked adequate content

and appropriate prompts; and

(2)
take reasonable care to ensure the suitability of its advice for customers who

were entitled to rely upon its judgment, in breach of Principle 9, as it failed

(a)
gather and record adequate customer information before advising on

relevant transactions;

(b)
gather and record evidence of undertaking any adequate assessment

of customers’ overall ATR or risk tolerance threshold in relation to

the size of the account;

(c)
gather and record evidence of customers’ CFD trading strategy;

(d)
ensure the suitability of customers for CFD trading was properly

documented; and

(e)
ensure that customers were suitable to trade in CFDs at the account

funding levels that the customers chose.

2.3.
The FSA considered Accendo’s failings to be serious because:

(1)
CFDs are high risk products which can expose customers to losses exceeding

their initial investment;

(2)
they increased the risk of customers entering into CFD transactions which

were unsuitable for them, in that they exposed them to an unacceptable level

of investment risk or were inappropriate given the customer’s level of

investment understanding and experience; and

(3)
they related to compliance monitoring, record-keeping and training

procedures.

2.4.
The FSA also considered that Accendo had taken significant steps to mitigate the

(1)
following a visit from the FSA, Accendo took significant steps to improve its

systems and controls, record-keeping and training and competence

procedures, including instructing an external compliance consultant to

undertake a review of the systems and controls relevant to its sales

procedures;

(2)
Accendo has cooperated fully with the FSA’s investigation;

(3)
Accendo agreed to make appropriate redress to customers. As a result

Accendo will pay redress of £19,298;

(4)
after contacting customers a skilled person identified little evidence that the

Firm’s customers had actually been unsuitable for CFD trading. Relevantly,

however, the skilled person was unable to form a view as to the suitability of

some customers to trade in CFDs, prior to contacting those customers, due to

a lack of recorded information kept by the Firm; and

(5)
all brokers held the securities qualification which the Firm mistakenly

thought was the correct qualification for them to hold. All brokers were

supervised by staff who held the derivatives qualification and upon becoming

aware of their mistake the Firm arranged for all brokers to sit the correct

derivatives examination which all brokers attained by the end of July 2010.

3.
DEFINITIONS

The definitions below are used in this Final Notice:

the “Act” means the Financial Services and Markets Act 2000;

“ATR” means attitude to risk;

“CFD” means Contracts for Difference;

the “FSA” means the Financial Services Authority; and

“KYC” means know your customer.

4.
FACTS AND MATTERS

BACKGROUND

Contracts for Differences

4.1.
CFDs are contracts, the purpose of which is to secure a profit or avoid a loss by

reference to fluctuations in the price of underlying property (including securities,

bonds and commodities) or in an index or other designated factor. CFDs allow

investors to make profits from predicting movements in the price or value of the

underlying property or index. For example, an investor may take a short position

(that is, predict a falling price) and gain where the price of the underlying asset

declines, but lose if the price rises. The reverse applies where a long position is

taken (that is, predict a rising price).

4.2.
Investors at Accendo typically used leverage to maximise the position taken, so that,

for instance, they might take a short position in the sum of £1,000 but would only

invest £50 of their own money and gear the balance of the position (£950).

4.3.
The extent of losses that might otherwise be incurred by a customer who takes a

position based on an erroneous prediction can be mitigated by the use of a stop loss.

A stop loss closes the position taken and caps the loss without any further action

from the customer once the underlying asset’s price has moved a pre-specified

amount in the opposite direction to that predicted by the customer.

4.4.
The main type of risk associated with CFDs is investment risk – while CFDs can

produce a positive return even when a stock or market index declines (because the

CFD is a short position) investment returns and in some cases the return of capital

are, as with any investment, dependent on the performance of market indices.

The Firm

4.5.
Accendo is an investment firm based in London which provided investment advice

to customers, largely in relation to CFDs. Accendo was authorised by the FSA on 7

January 2008 and had permission during the Relevant Period to undertake the

following regulated activities:

(1)
advising on investments (excluding pension transfers and opt-outs);

(2)
arranging (bringing about) deals in investments;

(3)
dealing in investments as agent;

(4)
making arrangements with a view to transactions in investments; and

(5)
agreeing to carry out the above regulated activities.

4.6.
During the Relevant Period, three individuals at Accendo were approved by the FSA

to hold significant influence functions. Sixteen individuals were approved by the

FSA to provide investment advice to customers. Accendo advised customers and

helped to arrange their transactions in CFDs with other FSA authorised firms who

dealt with the customers as principal (the "Principal"). As such, Accendo's role was

to act as an intermediary between the customer and the Principal. Accendo's

primary function was to guide customers as to how they could structure and execute

their CFDs with the Principal. During the relevant period, 98% of the Firm’s

business related to customers investing in CFDs.

Thematic review

4.7.
The FSA visited Accendo in April 2010 as part of an ongoing thematic review of the

selling practices of firms that advise on and/or deal in CFDs for retail customers.

During that visit, the FSA identified concerns with the Firm’s practices, and

subsequently invited it to vary its Part IV Permission. The Firm had been

considering its options as a result of the Retail Distribution Review, and had decided

to alter its business model to an execution-only model. Accordingly, on 16 July

2010 the Firm voluntarily varied its permission in accordance with the terms

proposed by the FSA.

4.8.
The FSA required Accendo to appoint a skilled person (the "Skilled Person") in

accordance with section 166 of the Act to conduct a review of all sales of CFDs in

the Relevant Period. Accendo has complied with that requirement. The Skilled

Person concluded that three customers (3.7%) of the sample of 82 customers were

unsuitable to trade in CFDs due to a lack of affordability and for nine customers

(11%) the suitability to trade in CFDs was unable to be determined because some of

the customers were unable to be contacted by the Skilled Person. Accordingly

Accendo has undertaken to provide appropriate redress to those customers and this

is assessed as £19,298.

4.9.
As a result of the FSA’s concerns arising from the visit in April 2010, and the initial

findings of the Skilled Person, the Firm was referred to Enforcement in September

2010.

CONDUCT IN ISSUE

Inadequate KYC information

7


4.10.
The account opening processes used by the Firm were flawed and failed to gather

sufficient customer information to enable brokers at the Firm to assess the suitability

of investments for customers. This included the following failings:

(1)
potential customers were able to open and fund trading accounts with the

Principal, via an external link on the Firm’s website, prior to the Firm having

conducted any customer information gathering (although the Principal would

have its own, separate procedure, for gathering the same information and the

client would not be able to trade until the information was obtained by the

Firm and separately by the Principal);

(2)
the collection and assessment of customer information was performed over

several stages which were not clearly defined within the Firm’s internal

systems and controls;

(3)
the Firm did not undertake and/or record any assessment of customers’

overall ATR or risk tolerance threshold in relation to the size of the account,

beyond a check that their level of account funding did not exceed the Firm’s

self-imposed limit of 25% of the customer’s liquid assets although each

customer was always asked by Accendo on a transaction by transaction basis

what they wanted to risk prior to the transaction being executed;

(4)
it was unclear from the Firm’s assessment of the customers’ net worth, and

therefore potential investment capital, whether illiquid assets were included;

(5)
it was unclear whether the Firm considered the net worth of a customer, the

customer’s income, or a combination of both to assess the level of potential

risk to which the customer was exposed through the account;

(6)
the KYC process did not determine the customer’s trading strategy and , for

example, the frequency with which the Firm’s customers were seeking to

undertake CFD transactions or the number of concurrent open positions and

in particular the amount that the customer wished to place at risk in any one

transaction; and

(7)
brokers gathered customer information (and information updates) via a series

of closed, rather than open, questions, which limited the amount of relevant

information gathered.

4.11.
Brokers made recommendations despite this lack of information, thereby putting

customers at risk of receiving unsuitable advice prior to deciding whether to enter

into a transaction with the Principal via the Firm.

Suitability record keeping

4.12.
The Firm’s assessment of the suitability of its customers for CFD trading was

inadequately recorded.

4.13.
An initial review of the Firm’s customer information for 82 customers conducted by

the Skilled Person identified that the Firm failed to take reasonable care to ensure

that the suitability of customers for CFD trading was properly documented, for

instance, in the Firm’s customer suitability checklist. On the information recorded

by the Firm at the time of allowing the customer to trade, the Skilled Person could

not establish the suitability of 16 (19.5%) of the sample of 82 customers to trade in

CFDs although it was later established by the Skilled Person (as mentioned below)

that a much smaller proportion of customers were in fact unsuitable.

4.14.
After a subsequent customer contact exercise the Skilled Person determined that

three customers (3.7%) of the sample of 82 customers were unsuitable to trade in

CFDs due to a lack of affordability. For seven customers (8.5%) the suitability to

trade in CFDs was unable to be determined because the customers either refused to

provide information to the Skilled Person or were unable to be contacted by the

Skilled Person. In respect of a further two customers (2.4%) their suitability to trade

in CFDs was unable to be determined for reasons unspecified by the Skilled Person.

4.15.
Nine of the 82 customers (11%) from the Skilled Person’s sample deposited monies

into their trading accounts with the Firm beyond a level that was suitable for them.

Accendo failed to take reasonable steps to ensure that over-funding did not occur. In

particular, the over funding of customer accounts by customers putting too much

money into them resulted in customers trading in CFDs which were unsuitable for

them, as they traded at greater levels of exposure than were suitable for them

although each customer was always asked by Accendo what they wanted to risk

prior to each transaction.

Compliance monitoring

4.16.
Accendo did not have a robust compliance monitoring programme in place in that:

(1)
call monitoring of account opening calls was limited to a sample review of

less than 10% of calls without listening to all relevant calls in their entirety;

(2)
the Firm’s call monitoring template for deal calls lacked adequate content

and appropriate prompts; and

(3)
the Firm failed to monitor pre-trade KYC check-list calls conducted by the

Firm’s approved persons.

Training and qualifications of advisors

4.17.
The Firm failed to ensure that its advisors were adequately trained given the

(1)
only three out of 16 individuals at the Firm who held the CF30 function and

who advised on derivatives were permitted to carry out this activity as they

had passed the derivatives examination from the list of examinations

maintained by the Financial Services Skills Council (the "Skills Council")

although all 16 individuals held the securities examination from the Skills

Council which the Firm had mistakenly thought was the correct examination

for them to hold; and

(2)
despite Accendo having a training and competence scheme, it failed to

employ appropriate processes to ensure the effectiveness of the training

provided.

Execution-only versus advisory transactions

4.18.
The Firm failed to take reasonable steps to ensure that its brokers always

distinguished between trades that were execution-only and those that were advisory

transactions. The FSA’s review of nine transactions (which formed part of a sample

of 29 transactions reviewed by the FSA) which were characterised by the Firm as

execution-only, found that in all cases brokers gave advice to customers with regard

to CFD positions.

5.
FAILINGS

5.1.
The relevant statutory and regulatory provisions, to the extent not set out in the body

of this Notice, are set out in the Annex to it.

5.2.
By reason of the facts and matters set out in paragraphs 4.10 to 4.18 above, the FSA

considered that the Firm failed to comply with Principles 3 and 9 as follows:

(1)
the Firm failed to take reasonable care to organise and control its affairs

responsibly and effectively, with adequate risk management systems, in

breach of Principle 3, in that it:

(a)
appointed brokers who did not hold the above prescribed

qualification;

(b)
failed to distinguish between execution-only and advisory trades; and

(c)
did not have a robust compliance monitoring programme in place ; as

call monitoring was limited to a sample review of less than 10% of all

calls and the Firm’s call monitoring template lacked adequate content

and appropriate prompts; and

(2)
the Firm failed to take reasonable care to ensure the suitability of its advice

to for customers who were entitled to rely upon its judgment, in breach of

Principle 9, as it failed to:

(a)
gather and record adequate customer information before advising on

relevant transactions;

(b)
gather and record evidence of undertaking any adequate assessment

of customers’ overall ATR or risk tolerance threshold in relation to

the size of the account; and

(c)
gather and record evidence of customers’ CFD trading strategy;

(d)
ensure the suitability of customers for CFD trading was properly

documented; and

(e)
ensure that customers were suitable to trade in CFDs at the account

funding levels that the customers chose and which the Firm on

occasion recommended, although each customer was always asked by

Accendo on a transaction by transaction basis what they wanted to

risk prior to the transaction being executed.

6.
SANCTION

6.1.
On 6 March 2010, the new penalty framework, referred to in the Decision Procedure

and Penalties Manual (“DEPP”) came into force. The Firm’s misconduct covers a

period straddling before and after 6 March 2010. However, the FSA considered that

the gravamen of the misconduct is pre 6 March 2010. Accordingly, the FSA

assessed the financial penalty under the regime prescribed for authorised firms in

Chapter 6 of the version of DEPP in force prior to 6 March 2010, which formed part

of the FSA Handbook during the Relevant Period. In determining the appropriate

level of financial penalty the FSA has also had regard to Chapter 7 of its

Enforcement Guide.

6.2.
The principal purpose of a financial penalty is to promote high standards of

regulatory conduct by deterring authorised firms who have committed breaches from

committing further breaches, helping to deter other persons from committing similar

breaches and demonstrating generally the benefits of compliant behaviour (DEPP

6.1.2G).

6.3.
The FSA will consider the full circumstances of each case when determining

whether or not to take action for a financial penalty. DEPP 6.5.2G set out, as

guidance, a non-exhaustive list of factors that may be of relevance in determining

the level of a financial penalty. The FSA considered that the following factors are

particularly relevant in this case.

Deterrence (DEPP 6.5.2(1)G)

6.4.
The financial penalty is intended to deter Accendo from further breaches of

regulatory rules and Principles. In addition it will promote high standards of

regulatory conduct by deterring other Firms from committing similar breaches and

demonstrating generally the benefit of compliant behaviour.

The nature, seriousness and impact of the breach in question (DEPP 6.5.2(2)G)

6.5.
In determining the appropriate sanction, the FSA has had regard to the seriousness

of the breaches by Accendo, including the nature of the requirements breached, the

number and duration of the breaches, the number of customers who have suffered

financial loss and the fact that the breaches revealed serious failings in Accendo’s

systems and controls.

The extent to which the breach was deliberate or reckless (DEPP 6.5.2(3)G)

6.6.
The FSA has determined that Accendo did not deliberately or recklessly contravene

regulatory requirements.

The size, financial resources and other circumstances of the person on whom

the penalty is to be imposed (DEPP 6.5.2(5)G)

6.7.
There is no evidence that Accendo is unable to pay the financial penalty.

The amount of benefit gained or loss avoided as a result of the breaches (DEPP

6.5.2(6)G)

6.8.
The FSA has taken account of the volume of relevant business done, income

received and profits made by Accendo from the sale of unsuitable CFDs in the

Relevant Period.

Conduct following the breaches (DEPP 6.5.2(8)G)

6.9.
In deciding the appropriate disciplinary sanction, the FSA recognised the following

factors which mitigate the seriousness of the findings:

(1)
following a visit from the FSA, Accendo took significant steps to improve its

systems and controls, record-keeping and training and competence

procedures, including instructing an external compliance consultant to

undertake a review of the systems and controls relevant to its sales

procedures;

(2)
Accendo has cooperated fully with the FSA’s investigation;

(3)
Accendo agreed to make appropriate redress to customers - as a result

Accendo has identified redress payable of £19,298;

(4)
after speaking to customers the Skilled Person identified little evidence that

the Firm’s customers had actually been unsuitable for CFD trading.

Relevantly, however, the Skilled Person was unable to form a view as to the

suitability of some customers to trade in CFDs, prior to speaking to those

customers, due to a lack of recorded information kept by the Firm; and

(5)
all brokers held the securities qualification which the Firm mistakenly

thought was the correct qualification for them to hold. All brokers were

supervised by staff who held the derivatives qualification and upon becoming

aware of their mistake the Firm arranged for all brokers to sit the correct

derivatives examination which all brokers attained by the end of July 2010.

Disciplinary record and compliance history (DEPP 6.5.2(9)G)

6.10.
The fact that Accendo has not been the subject of previous disciplinary action by the

FSA has been taken into account.

Other action taken by the FSA (DEPP 6.5.2G(10)G)

6.11.
In determining the level of financial penalty, the FSA has taken into account

penalties imposed by the FSA on other authorised persons for similar behaviour.

6.12.
The FSA, having regard to all the circumstances, considered that the appropriate

level of financial penalty is £70,000 before any discount for early settlement.

7.
PROCEDURAL MATTERS

7.1.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for payment

7.3.
The financial penalty is to be paid in 24 monthly instalments. The first instalment of

£2,333.33 must be paid by Accendo to the FSA within 14 days of the date of the

Final Notice. The following 22 equal instalments of £2,333.33 each must then be

paid on the 1st day of the month following the previous instalment (the “Due Date”).

If the Due Date for any given payment falls on a public holiday (including Saturdays

and Sundays) in any given month then the Due Date is deemed to be the first

business day immediately following the public holiday concerned. The final

instalment is due one month after the last of the 22 instalments, and is for £2,333.41.

7.4.
If Accendo realises any assets which enable it to pay the outstanding amount of the

financial penalty in full, it will do so within 14 days of those assets being realised.

If the financial penalty is not paid

7.5.
If any instalment is not paid by the due date for that instalment then the financial

penalty becomes payable immediately and in full. The FSA may recover the

outstanding amount as a debt owed by Accendo and due to the FSA.

7.6.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the FSA must publish such information about the matter to which this notice relates

as the FSA considers appropriate. The information may be published in such

manner as the FSA considers appropriate. However, the FSA may not publish

information if such publication would, in the opinion of the FSA, be unfair to you or

prejudicial to the interests of consumers.

7.7.
The FSA intends to publish such information about the matter to which this Final

Notice relates as it considers appropriate.

FSA contacts

7.8.
For more information concerning this matter generally, contact Kate Tuckley (direct

telephone line: 020 7066 7086/fax: 020 7066 7087) of the Enforcement and

Financial Crime Division of the FSA.

Tom Spender

FSA Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS AND

GUIDANCE

1.
Statutory provisions

1.1.
The FSA's statutory objectives, set out in section 2(2) of the Act, include the

protection of consumers.

1.2.
Section 206(1) of the Act provides: “if the Authority considers that an authorised

person has contravened a requirement imposed on him by or under this Act … it

may impose on him a penalty, in respect of the contravention, of such amount as it

considers appropriate”.

1.3.
Section 138 of the Act provides that the FSA may make such rules applying to

authorised persons with respect to the carrying on by them of regulated activities as

appear to it to be necessary or expedient for the purpose of protecting consumers.

2.
Relevant Handbook provisions

In exercising its power to impose a financial penalty, the FSA must have regard to

relevant provisions in the FSA Handbook. The main provisions relevant to the

action specified above are set out below.

3.
Principles for Businesses

3.1.
Under the FSA’s rule-making powers as referred to above, the FSA has published in

the FSA Handbook the Principles, which apply in whole, or in part, to all authorised

Firms.

3.2.
The Principles are a general statement of the fundamental obligations of authorised

Firms under the regulatory system and reflect the FSA’s regulatory objectives. An

authorised firm may be liable to disciplinary sanction where it is in breach of the

Principles.

3.3.
The Principles relevant to this matter are:

(1)
Principle 3 which provides that: “a firm must take reasonable care to

organise and control its affairs responsibly and effectively, with adequate

risk management systems”; and

(2)
Principle 9 which provides that: “a firm must take reasonable care to ensure

the suitability of its advice and discretionary decisions for any customer who

is entitled to rely upon its judgment.”

3.4.
The procedures to be followed in relation to the imposition of a financial penalty are

set out in sections 207 and 208 of the Act.