The Small Print in CFD/Spread Betting Accounts

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The Small Print in CFD/Spread Betting Accounts

Q.: How safe are client funds?

A: In the UK CFD providers are authorised and regulated by the Financial Services Authority (FSA). Under the rules, clients are classified as either private or intermediate customers. This decision is made by the compliance department of the CFD provider and will take into account the applicants' knowledge of CFDs together with their experience of trading on margin. A number of CFD providers will only take on intermediate customers.

The key from the providers' perspective is to accurately assess the client's understanding of the risks, since those sufficiently familiar with these areas will be categorised as intermediate customers and consequently will not benefit from the same level of protection afforded to private customers.

Intermediate customers do not enjoy the protection of rules relating to the issuing of direct-offer financial promotions, the obligation to disclose charges, remuneration and commission in writing, restrictions on the ability to lend money or grant credit to private customers, the notification of the circumstances in which a customer may be required to provide any margin requirements and ensuring that customers are able to obtain a reasonable price for non-exchange traded securities.

There are also other key differences for intermediate customers. In particular, money held on behalf of these clients will not be subject to the protections conferred by the FSA's client money rules. In other words these funds will not be segregated in a ring-fenced account.

The one advantage of this is that pooling together the intermediate customers' funds enables them to enjoy a higher rate of interest than private customers. On the downside though, in the unlikely event of the company becoming insolvent, intermediate customers would only rank as general creditors, making it less likely that they would get all their money back. In addition, intermediate customers do not have the automatic right to receive 'best execution' in all markets and lose their rights of access to the financial ombudsman scheme.

Q.: The small print on CFD/spread betting accounts worries me...

A: To my understanding, during the lead up to MiFID when everyone was freaking out about it the FSA's view was essentially, "you'd better not non-segregated 'widows & orphans'". Indeed, MiFID threw a big spanner into all of this. I queried a professional acquaintance from an industry leading firm and the acquaintance said that the FSA told that person that they liked the "old" way of pre-MIFID separating "private" (seg) from "intermediate" (non-segregated) customers.

The damn difficult thing about MiFID is that almost everyone is going to be defined as a "retail" customer, but then, at the same time, you have this Title Transfer Collateral thing which as I've read in the FSA regulations, can theoretically enable anyone to get non segregated treatment from the CFD provider.

Bottom line is that it's your choice - not the firm's - to be non-segregated. You tell them you don't want to be subject to a Title Transfer Collateral arrangement and to confirm same to you in writing. They can say no, but they can't take your business. Hit up the next shop and you'll get it to work out for you eventually.

Now, under MiFID any classification of client can enter into the Title Transfer Collateral arrangement and that effectively gets them out of segregated funds status. Also, MiFID requires a best execution policy across the board...no more "spread bet waiver". This means that at most providers anyone can get a CFD account. When you sign up now, you'll be handed this "trade and execution policy" or something similarly titled. There is your best execution…so in the end a paper job and its business as usual even with MiFID but you, the client, have to be shepherded to that result via different legal gymnast cities that existed pre-MiFID.

 ...Continues here - Changing Margin Requirements and Providers Moving the Goalposts