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ombudsman news

issue 5

May 2001

case studies - spread betting  

05/03

Mr G contacted us after he had run up trading losses of £110,000 with three separate firms. He was concerned that he had been able to open accounts with these firms despite having no history of trading in such areas, and he thought the firms should be required to compensate him for his losses.

His letter stated: "I have to think very deeply about how I find myself in this position when I have never ever had any experience of either gambling or trading of any kind. In fact my investment profile has always been that of life savings held in unit trusts and just a dabbling in individual shares and warrants. I made no attempt to conceal either my ignorance of this form of equity exposure or the fact that I was a complete novice in this area. Nevertheless, I was able to open up extremely large positions even though I was obviously totally unable at the time to estimate the extent of my exposure and clearly had no trading experience or skills to manage these positions."

"I believe I was swept up in the hype of the market like many, but also had the misfortune to fall into a sophisticated marketing and PR campaign promoting spread betting to retail investors as a tax efficient way of gaining equity exposure."

We were unable to assist him. Each of the firms appeared to have complied with the regulator's rules in requiring him to sign the appropriate risk disclosure notice and customer agreement. As an execution-only client (that is to say, one to whom no advice was provided) the onus was on Mr G to establish whether such trading was suitable for him. In addition, in at least one of the cases he appeared to have presented himself to the firm as someone with experience of the derivatives market.

05/04

Mr J contacted us after a firm threatened him with court proceedings to recover the debt he owed. He accepted responsibility for the debt but was not in a position to pay it. He felt the firm should accept some level of blame for allowing the debt to accumulate unchecked and he considered that the firm should have enforced limits on his account.

Mr J had begun betting regularly in June 2000, on Euro 2000 and other sporting events. Despite some initial success, by the end of that first month he had accumulated a debt of over £1,000. Three months later, in one evening alone he lost over £600 on the result of a European football match, and two days later he lost a further £500. By the time he closed his account, in October 2000, he owed £1,800.

At that time he still had three open bets, on football games in the English Premier League. The firm immediately closed the bets at a loss. Mr J disputed his liability for those losses, arguing that the firm should have allowed the bets to run, despite the risk that they might have further increased his losses.

He wrote to us as follows: "I was wrongly offered a credit limit of £2,000 based on nil savings and a salary of £12,000. No restrictions were placed on any of my bets and in four months of trading, I was only ever once asked to make a payment of any kind and that represented a small fraction of my total debt at that particular time ... Only after my final two "investments" lost me well in excess of a month's salary in the space of two days did I contact them and ask for my account to be closed."

"I was nothing more than a casual gambler who bet for fun until I was given a £2,000 credit limit ... As I spiralled out of control, I became ill from my own depression and acted and invested irrationally - left unchecked and out of my depth."

The firm admitted that, "With the benefit of hindsight, Mr J was an unsuitable candidate for spread-betting. However, he had signed a declaration that he had received, read and understood our rules and regulations. These do include warnings that spread betting is volatile and that people can lose substantial amounts of money."

The firm agreed not to pursue its court action provided Mr J paid off the debt at £50 per month. It also agreed to review the situation after 18 months, provided the repayments had been regularly forthcoming over that period.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.