Spread betting and contracts for difference

Find out more about the types of complaint we see:

• Where you gave advice

  Most contracts for difference and spread bet trades are sold on an execution-only basis. But where you offered accounts with an advisory service, 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

  In these cases, we’ll think about whether the advice you gave was suitable.

  This customer didn’t need to have traded in this way before, but 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
  • whether the customer understood the risks of trading in this way
  • the other types of investments the customer had previously held

  We'll also need to consider 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 you provide. We'll particularly look 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 said the account wasn't appropriate, the COBS rules say that you could still open an account if a suitable risk warning was given to and accepted by the customer.

  If you didn’t give a risk warning – and in cases where we disagree with you that the account was appropriate – we’re likely to say that you’ve done something wrong. But before upholding the complaint, we’ll need to consider whether, even if a warning had been given, the customer was likely to have opened an account anyway.

   

• Where you didn’t give advice

  Spread betting and contracts for difference trades are usually sold on an execution-only basis.

  When carrying out execution-only transactions, you’ll need to assess whether the investment is appropriate for the customer. The information you’ll need to look at is set out in the Financial Conduct Authority’s Conduct of Business Sourcebook COBS 10.

• Voided trades

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

  Manifest error 

  In some cases either you or the customer say 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.

  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 price quoted originally was wrong.

  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 think the trade was made by the customer in good faith. In other words, they couldn't have reasonably known that the price was wrong at the time of the trade.

  Experienced trader loses out following pricing error 

  Felicity was a regular trader of contracts for difference. She 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, the price quoted by the business had fallen to under $100, and she immediately closed the position by taking out a buy contract of the same size, creating a large profit.

  The next day, the business told her it was cancelling her 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. Felicity complained.

  We thought that as a regular trader, Felicity should reasonably have known at the time she placed the trade that the price was wrong. So we said that the business didn’t have to pay the money she believed she was entitled to.

  Unfair advantage

  We sometimes see complaints where a business has cancelled a number of a consumer's trades, or stopped the consumer from withdrawing money from their account.

  You may say a consumer has used scalping or price latency to gain an unfair advantage over the business, and cancelled the consumer's trades because of this.

  If this is the case, we'll look at your terms and conditions to see what you say about the types of trading strategy you’ll allow. For example, some say customers aren't allowed to use specialist software to enter orders, or that you won't accept trades which are only open for a very short amount of time.

  We'll also look at the customer's trading history. If we think it's likely the customer has benefitted from an unfair advantage to eliminate their risk, we’ll usually agree that the trades should be cancelled.

  Price spikes 

  Sometimes prices will spike, meaning there's a sudden move in the price which is quickly reversed. We see complaints about trades carried out during these spikes, in which case we'll consider:

  • the terms and conditions
  • 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

  Pricing is usually set by you, the business. But there are external factors that 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 been disadvantaged because you manipulated the prices due to 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. In these cases we'd be 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.

  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) then we'd be unlikely to uphold the complaint.

  Slippage 

  Sometimes orders are carried out at a worse price than the customer chose. This can happen when the market “gaps” through the customer’s target price - moves very quickly from above the target to a price much lower than the target.

  Often this will happen when the market opens – if the price has moved significantly away from the previous day's closing price. It can also happen when the market moves quickly, such as after the announcement of important news or economic data.
  
  We'll look at the terms and conditions, and any other product documents you sent the customer. We’ll need to see what was said about how stop orders would be executed, for example that they'd be treated as market orders. We'll also look at what was happening in the underlying market at the time.

  We'll be unlikely to uphold the complaint when the business made it clear it couldn't guarantee stop orders would be carried out at the exact level the customer asked for.

  But we’ll also bear in mind how the business said it would treat the reverse scenario – that is, orders when a trade is executed at a better price than the one the customer chose.

  If you kept the profits when trades were carried out at a better price, but passed losses on to customers when trades happened at a worse price, we’d probably say you’d acted unfairly. The Financial Conduct Authority has fined businesses for this in the past.

• Margin calls

  An unfavourable market move could mean that a customer owes you more than the amount they’ve staked. To protect against this, you’ll require customers to maintain a minimum margin requirement in their account.

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

  We see complaints about things businesses do in these situations, including:

  • closing a position too quickly
  • closing a position that shouldn't have been closed at all
  • not closing a position quickly enough
  • allowing a position to remain open which the customer later says 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.

  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.

  Customer refuses to increase margin, loses out then complains the business didn’t wait

  Harry 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 him to provide more margin to keep the positions open. Harry decided against putting more money forward and chose to close the positions, causing him significant loss.

  Harry complained. He said even as the business was asking him to provide more margin, the prices were moving in his favour and the business should have waited.

  On investigation, we were satisfied that the account terms and conditions made it clear on what basis the business could request more margin. We also listened to recordings of the phone calls when Harry initially opened his positions. During these calls, the same message was repeated to him.

  We didn’t uphold Harry’s complaint.