Customer background checks among some spread betting and currency trading firms are so lax that would-be punters are opening accounts under names including Kermit the Frog and Mickey Mouse, according to the new owner of City Index.
Glenn Stevens, the chief executive of Gain Capital, aimed a broadside at regulators yesterday after the New York-based firm completed its $118m (£79m) deal to buy City Index, the firm formerly owned by Icap’s founder Michael Spencer.
Gain Capital is regulated by the Financial Conduct Authority but Mr Stevens hit out at the proliferation of brokers in London operating under other jurisdictions – often with less stringent checks – and “passported” into the UK under EU regulations including the Markets in Financial Instruments Directive (Mifid). Customers are “literally able to open an account as Kermit the Frog and Mickey Mouse” with some firms, he said.
According to the Financial Conduct Authority there are 90 firms on its register with permission to provide contract for difference (CFD) or forex trading services in London, of which 54 are passported in from Cyprus and registered rather than regulated by the FCA. A further 19 are passported in from other locations.
He called on the FCA to “tighten” its stance on passported firms, adding: “On the one hand having competition is good. But having competition that plays by different rules isn’t good. Too many of these companies operate kind of dodgy.”
Mr Stevens said: “I have even heard of people registering who were able to open and register accounts as Mickey Mouse and Kermit the Frog. Some of these firms’ version of KYC – know your customer – is such a light touch that they are letting customers go right through.
“That tells me that they are not following the same rules that we are, checking customers’ source of funds and doing all the sorts of suitability stuff that the FCA wants.”
He added: “It bothers me that there’s this backdoor Cypriot thing. It can be Gibraltar, it can be any number of locations. I know why they put this passporting thing in place because it was well intentioned but not if everybody applies it differently, and that is the challenge there.”
Gain Capital’s deal to buy City Index creates the UK’s second-biggest spread betting firm, behind market leader IG. Mr Spencer remains an investor after the takeover.
The acquisitive Gain is still on the lookout for further acquisitions in the UK after 11 deals in the past five years and six in the past 18 months. The spending spree has created a forex and spread betting firm spanning retail and institutional clients with about 240,000 customers and holding $1.1bn in client cash.
Mr Stevens added: “Gain Capital has been pretty active on the corporate M&A front for a while. It sounds simple but we want to be able to be the top provider of trading services for different types of customers, in different types of products, in different types of market. We don’t do M&A to gut companies and suck all the expenses out.”