Poland based Retail FX and CFDs broker XTB SA (WSE:XTB) was hit with a PLN 20 million (USD $5.53 million) fine by Polish financial regulator Komisja Nadzoru Finansowego (KNF), for a variety of issues and problems cited by the regulator.

KNF decision

The KNF cited the following in its decision, covering mainly the period of early 2022 until mid to late 2023, for what is a pretty hefty fine by online brokerage standards.

1. failing to properly determine – whether the client has the knowledge and experience necessary to be aware of the risks associated with the brokerage services or financial instruments provided to him,
2. failure to determine the target group – in an appropriate and proportionate manner, taking into account the nature of the financial instrument and its complexity,
3. failure to reliably determine the circumstances – in connection with the publication of the HOT list made available to clients, which in relation to the services of executing client orders on own account may give rise to a conflict of interest, and
4. providing clients or potential clients with unreliable and misleading information – regarding financial instruments that are the subject of brokerage services provided by this firm and regarding all risks associated with contracts for difference (CFDs), in a sufficiently detailed manner to enable the client to make informed investment decisions.

Suitability testing

The regulator stated that XTB, based in Warsaw, failed to meet the requirements imposed on investment firms by law, resulting in the company conducting its business in an unreliable and unprofessional manner. The company committed violations in the area of ​​product suitability testing and management, including:

a) the use of MIFID questionnaires and the methodology for assessing the adequacy of services and products offered by the Company to the individual situation of the client, which resulted in an improper determination of whether the client had the knowledge and experience necessary to be aware of the risks associated with the brokerage services and financial instruments provided to him, and

b) failure to define the target group in an appropriate and proportionate manner, taking into account the nature of the financial instrument and its complexity.

Appropriateness of risky and complex instruments, such as CFDs

The Company determined the appropriateness of risky and complex instruments, such as CFDs, based on clients’ knowledge and experience with simple instruments. Potential clients who, when completing the MIFID survey, possessed knowledge and experience only with simple instruments, combined with their other responses, received false information about the appropriateness of CFDs. The assessment methodology used by the Company did not achieve the intended purpose of conducting these surveys, namely, determining whether the client possessed the knowledge and experience necessary to understand the risks associated with purchasing CFDs offered by the Company.

Target groups

Additionally, XTB formally identified several target groups (for specific types of instruments), but the criteria used to assign clients to each group were identical in each case. The target group should be defined appropriately and proportionately, taking into account the nature of the financial instrument, its complexity, including related costs and fee structure, reward-to-risk ratio, liquidity, and innovative nature. The target group for a financial instrument is a group of its potential purchasers.

In shaping the target groups for individual product groups, the Company failed to consider primarily the level of complexity of the financial instruments in its offering, as well as the risks associated with investing in them. At the same time, the flawed design and methodology of the MiFID survey, also used to identify client characteristics for the purpose of meeting the target group qualification criteria, meant that clients lacking knowledge and experience in CFD investing, who obtained a positive MIFID survey result, were able to invest in all instruments in the Company’s offering – both simple and complex – as they fell into the target group for these products. In such a situation, a significant risk for clients may materialize through incurring a loss (in connection with the transactions concluded) caused by investing in financial instruments that are inappropriate for them.

HOT list

Furthermore, the Company committed a violation by failing to identify circumstances in connection with the publication of the HOT list – made available to clients – that could have given rise to a conflict of interest in relation to the execution of client orders on own account. The Company’s conflict of interest policy did not allow clients to identify conflicts of interest related to the algorithm for placing financial instruments on the HOT list, including the specific promotion of instruments whose trading involved higher spreads and, therefore, potentially higher revenue for the Company.

The Company did not provide clients or potential clients with full information on the financial instruments that are the subject of the brokerage services it provides, including all risks associated with contracts for difference (CFDs), in sufficient detail to enable the client to make informed investment decisions.

Full compliance of market practices regarding the sale of complex financial instruments that generate increased risks with applicable regulations is crucial for the protection of retail investors in the capital market. The KNF said that CFDs are characterized by a high level of risk, and should only be purchased by investors with appropriate knowledge and experience who are willing to accept the risk of losing all their invested funds. The risk of investing in such instruments is demonstrated by the results of the annual PFSA (Polish Financial Supervision Authority) study of client performance on the Forex market, which shows that the majority of active clients (70 to 80%) systematically lose money on transactions in these instruments.

Ensuring full compliance of market practices for this category of instruments with the principles of retail client protection is a priority for the supervisory authority.

The full KNF decision can be seen here (in the original Polish).