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online technical resource

spread-betting and contracts for difference (CFDs)

This section of our website describes how we approach complaints made by consumers about spread-betting and contracts for difference (CFDs).

Spread-betting it is a type of CFD. So unlike other forms of betting, it is recognised as an investment under the Financial Services and Markets Act 2000. This means we can look at complaints about spread-betting.

overview

A CFD is a contract between a consumer (the investor) and a business. At the end of the contract, the investor receives the difference between the opening and closing price of an asset (or pays the difference if it is negative).

In comparison, spread-betting allows the investor to speculate on markets and make profits or losses based on their stake and how much the price moves.
CFDs and spread-bets both offer consumers the potential of very high returns.

But they also carry a far higher level of risk than traditional gambling. This is because the consumer can lose more than their original stake.
Consumers are usually required to have between 5% and 10% of the value of their open "positions" on deposit with the business. This is known as "margin". The precise amount of margin required by the business can vary depending on the volatility of the underlying market.

Consumers are given the opportunity to speculate on price movements in a wide range of markets without taking physical ownership of the product being traded (if there is one). They are able to benefit from rises and falls in the underlying market price.

In some cases we see, a businesses is about to start court proceedings to reclaim money from a consumer. We will treat these complaints with urgency.

how spread-betting and CFDs work - an example

Mr A and Mr B separately bet on the total number of goals that will be scored in a particular football match - for example, the FA Cup Final.
the spread

  • The business quotes a market in the total number of goals that will be scored in 90 minutes.
  • "The spread" refers to the number of goals the business thinks will be scored in 90 minutes - it is a two-way dealing price.
  • The business sets the trading price at 2.7 goals to 3.0 goals. So the spread is shown as 2.7-3.0

selling the spread

  • Mr A thinks there will be fewer than 2.7 goals scored during 90 minutes' play, and stakes £5 per goal on this. This is known as "selling the spread".
  • The match finishes 0-0, so Mr A wins 2.7 times his stake - (2.7 x £5 = a profit of £13.50). But if it had finished 2-1, Mr A would have lost 0.3 times his stake - the difference between the price traded (2.7), and the actual number of goals scored (3). Mr A would have lost £1.50 (0.3 x £5).

buying the spread

  • Mr B thinks there will be more than three goals scored during 90 minutes' play, and stakes £5 per goal on this. This is known as "buying the spread".
  • Because the match finishes 0-0, Mr B loses 3 times his stake - (3.0 x £5 = a loss of £15). If it had finished 2-1, Mr B would have neither won nor lost as the market settled at the price he traded - 3.0.

If a consumer bought the spread and the market then rose, they could sell the spread to realise their profit. So if a market rose to a spread of 5.0-5.3 goals, a consumer at 3.0 (holding a "long" position) could sell at 5.0 to realise a profit.

Although the above examples relate to spread-betting, CFDs operate in the same way.

main differences between spread-betting and CFDs

There are several main differences:

  • Spread-bets usually have a fixed timescale whereas CFDs do not. "Long" CFD positions attract daily finance charges and "short" CFD positions earn interest. But no time-related charge or benefit applies to spread-betting.
  • Capital Gains Tax applies to gains made from CFD trading, but not to gains made from spread-betting (although losses on spread-bets cannot be used to offset against gains elsewhere).
  • Consumers rarely pay commission when placing spread-bets - the business's charges tend to be included in the spread. But quoted prices of CFDs usually match the underlying market and the business then charges commission for carrying out the trade.
  • CFDs tend to be linked to "real" assets such as shares, commodities and currencies. But spread-betting takes place on markets made across a wider range of activities - for example, the outcomes of sporting events or elections.

The following sections provide more detailed information about our approach when we investigate complaints about spread-betting and CFDs:

whether the investment was appropriate

These types of investments are usually made without the consumer receiving investment advice from the business - although we occasionally see cases where a business gave investment advice to a consumer trading in CFDs. There is more information on our approach to complaints about "execution only" sales in the related section of our website.

Whether or not advice was given, we will consider whether the business ensured that the consumer was aware of the high level of risk involved. We will use the available evidence to decide:

  • whether the business made it clear to the consumer how spread-betting or CFD trading works - and what the risks were;
  • the extent of the consumer's knowledge and experience;
  • the consumer's appetite for risk; and
  • how far the consumer could afford losses that might exceed their initial stake.

The regulator has identified losing more than the initial stake as the key risk to consumers. There is more information about this in the Financial Services Authority's (FSA) spread-betting review (March 2007).

Before a spread-betting or CFD account is opened for a consumer, they are usually asked to agree to a number of risk warnings. These are set out either in the terms and conditions of the account or in a separate risk warnings brochure provided by the business.

If we are satisfied that the consumer understood the risks involved and had an appetite for those risks, it is unlikely we will decide that the investment was inappropriate.

where advice was not given

Even where the business did not provide the consumer with investment advice, we will consider whether the investment was appropriate.

The FCA's COBS rules set out the information a business needs to consider in assessing the appropriateness of an investment. The rules say that even if the business believes the investment is not appropriate, it may still go ahead and invest if it gives a suitable risk warning to the consumer.

The FCA published some guidance about how businesses should interpret the COBS rules.

where advice was given and discretionary CFD trading/spread-betting

Where the business provided the consumer with investment advice, we will also look at whether that advice was suitable. There is more information about our approach to complaints about suitability in the section of our website on assessing the suitability of investments.

We sometimes see cases where a consumer appointed a regulated business to carry out CFD trading or spread-betting on a discretionary basis - often using a power of attorney. Generally, a regulated business will have greater expertise and systems and controls for avoiding losses. So on the face of it, discretionary arrangements seem like a way of lowering the risks involved with CFDs - and are therefore attractive to some consumers.

But in practice, trading under these arrangements can be subject to tight limits for the taking of profits or avoiding losses - as well as relatively high charges. Consumers do not always fully appreciate the combined effect of these two factors - meaning they do not fully understand the risks involved.

When we look at complaints about discretionary CFD trading or spread-betting, we assess whether the arrangements were properly explained to and suitable for the consumer concerned.

whether trades were priced correctly

In both spread-betting and CFD trading, the business generally sets the prices consumers can trade at. Consumers sometimes complain that they have been disadvantaged because the prices have been manipulated in the business's favour.
In these cases, we look at the evidence we have about how the business arrived at its quotes. We are unlikely to uphold the complaint if we find that the business's prices were related to the relevant market price:

  • by a fixed amount; or
  • within a specified range.

We sometimes see cases where either the business or the consumer says that a trade was carried out at the wrong price. In this situation, we look at whether terms and conditions of the contract say the business is entitled to cancel or re-price trades when a mistake is made.

If we find that the business can cancel or amend a trade under the terms and conditions, we will take into account the Unfair Terms in Consumer Contracts Regulations 1999, which say that:

A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.

This means we will usually say that the trade may 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 price quoted originally was wrong.

But if we are satisfied that the trade was made in good faith by the consumer - in other words, that they could not reasonably have known that the price was wrong at the time of the trade - we are unlikely to agree that it should be cancelled or amended even if a price was wrong.

case study 1

Mr F was a regular trader of CFDs. He opened a "sell" contract on the business's gold market at a price of $1050/oz, hoping to see the price fall. The following week, he saw that the price quoted by the business had fallen to under $100, and immediately closed the position by taking out a "buy" contract of the same size. This created a large profit for Mr F.

The next day, the business told Mr F that it was cancelling his "buy" contract because the price it quoted had been wrong. The actual market price at the time had been above $1000/oz. The business referred to a clause in its terms and conditions that said it could cancel a trade if the price had been "manifestly" wrong. Mr F complained.

We thought that as a regular trader, Mr F should reasonably have known at the time he placed the trade that the price was wrong. So we said that the business did not have to pay the money he believed he was entitled to.

stop loss and limit orders

Consumers often ask for trades to be carried out once a price reaches a certain target level. These instructions are known as "limit" or "stop loss" orders.
Disputes sometimes arise when prices "spike" - where there is a sudden sharp movement in the price that is quickly reversed. Consumers and businesses can take different views about whether or not a trade should have been carried out during the "spike".
To decide whether what happened was fair in each case, we look at evidence including:

  • the account terms and conditions;
  • trading activity in the underlying market; and
  • what caused the "spike" to happen.

For example, if we are persuaded that a significant volume of legitimate trading took place in the underlying market during the "spike", we are likely to say that a trade executed by the business at that time should remain - even if the "spike" was very short-lived.

We also see complaints about stop loss orders carried out below the price that the consumer specified. This sometimes happens when a market "gapped through" the consumer's target price - in other words, moved very quickly from above the target to a point significantly below it.

In these cases, we will examine the account terms and conditions - and any other product literature that was sent to the consumer - to see what was said about how stop loss orders would be executed.

If we are satisfied that the business made it clear that it could not always guarantee that stop loss orders would be carried out at the level the consumer asked for, we are unlikely to uphold the complaint

exceptional profits

We sometimes see cases where consumers have generated extremely large profits in a very short space of time. This may be because the consumer has access to a faster price feed than that used by the business, allowing them to anticipate movements in the business's prices and trade accordingly.

It is not always possible for us to know how exceptional profits have been achieved. But if we decide that it is more likely than not that the consumer benefited from an unfair advantage, we may say that the relevant trades should be voided.

credit and margin control

Consumers who carry out CFD trading and spread-betting often find that their total liability exceeds the sum they originally staked. Where businesses consider that market movements have led to a particular account exposing them to too much risk, they can try to reduce this by asking the consumer to provide more "margin" (in other words, to deposit more money to the account).

Where a consumer does not provide more margin, the business may close some of their open positions. We sometimes see cases where the consumer complains that the business was too hasty in closing a position. We also see cases where the business decided to allow a position to remain open, and the consumer later complains that it should have been closed.

In either of these circumstances, we examine the account terms and conditions to see what they say about the steps the business can take to manage the consumer's position. For example, some terms and conditions say how long the business might wait before acting.

It is unlikely that we would uphold a complaint about a business closing open positions if we are satisfied that the business was entitled to close out trades - and acted reasonably in doing so.

We do not apply the benefit of hindsight when we decide complaints. So even if the business's exposure would have been reduced later anyway because prices moved back in the consumer's favour, we would be likely to reach the same conclusion.

case study 2

Mr H held a number of open bets on the business's sterling vs US dollar index. A few days after the last of these had been opened, the business asked Mr H to provide more margin in order to keep the positions open. Mr H decided against putting more money forward and chose to close the positions instead. This caused him to realise a significant loss.

Mr H complained, saying that even as the business was asking him to provide more margin, the prices were moving back in his favour. He said that the business should have waited.

On investigation, we were satisfied that the account terms and condition made it clear on what basis the business could request more margin - and the circumstances in which this could take place.

We also listened to recordings of the phone calls made when Mr H initially opened his positions. During these calls the same message was repeated to him.

So we did not uphold his complaint.

other information we publish

ombudsman news case studies

additional resources

The FCA's Money Advice Service website.

Spreadex Ltd v Sanjit Sekhon (2008) - the court decided that although the business was liable to the consumer for his financial losses, the consumer was contributorily liable for 85% of those losses. This was because the decision to keep the spread-betting positions open despite heavy trading losses was driven by the consumer and he was not an inexperienced or vulnerable person.

Spreadex Ltd v Vijay Ram Battu (2005) - the consumer was unhappy that the business closed out his positions after failing to receive the margin it had asked for. There was also a dispute over the precise amount that the business was entitled to recover.

help for businesses and consumer advisers

contact our technical advice desk on 020 7964 1400

This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.

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  • The law requires us to decide each case on the basis of our existing powers and what is fair in the circumstances of that particular case.
    We take into account the law, regulators' rules and guidance, relevant codes and good industry practice at the relevant time.
    We do not have power to make rules for financial businesses.
    Our current approach may develop in the light of circumstances disclosed by further cases we receive.
    We may decide that fairness requires a different approach in a particular case.