Spread betting and contracts for difference

How we resolve complaints about spread betting and CFDs

• Was the investment appropriate?

  When carrying out execution-only transactions, you must assess whether the investment is appropriate for the customer. See COBS 10.

  If you offered accounts with an advisory service, we’ll look into whether that advice was suitable. Customers sometimes tell us they:

  • didn't understand the risks
  • didn’t understand how much they could lose
  • shouldn't have been allowed to open their accounts to begin with

  To assess whether the COBS rules were satisfied, we'll need to look at:

  • the customer's experience and knowledge of spread bets and contracts for difference, although they won’t need to have traded in this way before
  • whether the customer understood the risks of this sort of trading
  • other types of investments the customer has held in the past

  We'll also want to know whether you explained to the customer how contracts for difference trading or spread betting worked, and what the risks involved were.

  Risk warnings are often given as part of the terms and conditions of an account or in a separate document. We'll be looking for warnings about:

  • the leveraged nature of the investments
  • the possibility of losing more than your initial stake

  If we're satisfied the customer understood the risks involved, and had an appetite for those risks, we’re likely to agree that the account was appropriate.

  If you didn’t give a risk warning – and we believe the account wasn’t appropriate – we’re likely to say that you’ve done something wrong. However, before we uphold the complaint, we’ll look into whether the customer would have disregarded any warnings anyway and gone ahead and opened an account.

  You may have told your customer that the account wasn't appropriate and they may have accepted your risk warning.  If so, according to the FCA's guidance, it was your firm's decision to let the customer open an account. In those circumstances, we’ll look at everything your firm knew about the customer to decide whether it was fair for your firm to let the customer open an account.

  Complaints that involve gambling-related harm

• Voided trades

  We sometimes see complaints about businesses that have cancelled a number of a customer's trades, or stopped them from withdrawing money from their account.

  Manifest error

  If you or the customer say a trade was carried out at the wrong price, we’ll check the terms and conditions of the contract to see if the business is entitled to cancel or re-price trades when a mistake is made.

  We may say that the trade should be cancelled or amended if we decide:

  • the relevant contract term is fair, and
  • it would have been obvious to a reasonable person that the original price quoted was wrong – or in legal terms, a ‘manifest error’

  It's important to note that a wrong price alone isn't necessarily enough to say the business was fair in cancelling or re-pricing a trade.

  We're unlikely to agree a trade should be cancelled or re-priced if we believe the customer made it in good faith. That is, if they couldn't have reasonably known that the price was wrong at the time of the trade.

  Unfair advantage

  You may have cancelled a consumer’s trades because you believe they’ve used scalping or price latency to gain an unfair advantage over your business.

  If the consumer then complains to us, we'll look at the contract’s terms and conditions to see what types of trading strategy you’ll allow. For example, some say customers can’t use specialist software to enter orders, or you won't accept trades that are only open for a short period.

  We'll also look at the customer's trading history. If we think the customer is likely to have benefitted from an unfair advantage to eliminate their risk, we’ll usually agree you should cancel the trades.

  Price spikes

  When a consumer complains about trades carried out during price spikes, we'll consider:

  • the terms and conditions in the contract
  • the trading activity in the underlying market
  • the cause of the spike

  If a lot of trading took place in the underlying market during the spike, we're likely to say a trade you carried out should stand – even if the spike was very brief.

• Pricing

  The business usually sets pricing, but external factors can affect the price. We'll look at each complaint on a case-by-case basis.

  Spread widening

  Although contracts for differences and spread bets are linked to an underlying market, the prices customers see are usually set by the business. Customers may complain they've lost out because you manipulated the prices through 'spread widening' – the increase between the bid price and the offer price.

  In these cases, we'll need to look at how you arrived at the prices you quoted to customers. Some businesses quote prices which are related to the underlying market price by a fixed amount or within a specified range. If that’s the case, we’re unlikely to uphold the complaint.

  If your prices aren't directly tied to the market price, we'll look at the terms and conditions – as well as the reason for the change in the price or spread.

  We're unlikely to uphold the complaint if:

  • the terms allow for the business to change the size of the spread, and
  • there is a reasonable explanation for the change – such as increased volatility after the release of economic data

  Gapping or slippage

  When a customer complains about this, we’ll want to see what you said about how stop orders would be executed, for example that they'd be treated as market orders. So we’ll look at:

  • the terms and conditions in your contract with them
  • any other product documents you sent the customer, and
  • what was happening in the underlying market at the time

  We're unlikely to uphold the complaint if you made it clear you couldn't stop gapping or slippage. That is, you made it clear you couldn’t guarantee stop orders would be carried out at the exact level the customer asked for.

  But we'll also look at what you said you’d do in the opposite situation. If you kept the profits when trades were carried out at a better price – but passed losses on to your customer when trades happened at a worse price – we'd probably say you acted unfairly.

  The FCA has fined businesses for this in the past.

• Margin calls

  When a customer's account equity falls below the margin requirement, the customer will need to deposit more money to the account to add more margin. If they don’t, you may close some of their positions.

  When this has happened, consumers may complain that a business:

  • closed a position too quickly
  • closed a position that shouldn't have been closed at all
  • didn’t close a position quickly enough
  • allowed a position to remain open which they believe should have been closed

  We'll look at the terms and conditions to see what you could do to manage the customer's positions. If we’re satisfied that you were allowed to close positions – and acted reasonably in doing so – we’re unlikely to uphold the complaint.

  However, if prices moved back in the customer's favour later, we're likely to reach the same conclusion about how you handled the margin dispute.