The Financial Ombudsman Service (FOS) has registered an increase in complaints in relation to advisory CFD providers with particular emphasis on transaction and broker charges. The Financial Ombudsman Service has reported 250 cases in the last few months about advisory CFD services. Here, it is important to note that the complaints were in relation to discretionary or advisory CFD providers, not execution-only services.
‘A few clients have stated that they weren’t aware that the investment risk of CFD trading was so high or not suitable for them,’ said Martyn James of the FOS. ‘Some advisory broker clients also inferred that the way that the trading was conducted meant there was little chance of them making a return.’
Most of the complaints relate to provider’s margins – the deposits that clients put into their accounts to fund trading positions being eaten away too rapidly by various charges.
‘Clients are usually requested to make a margin deposit between £5,000 and £25,000,’ James said. ‘The advisory brokerage then charges a fee for each executed individual trade. But, in a number of cases we’ve examined, it has resulted in the consumer losing most or all of their initial margin payment as the trades were made in a relatively short period.’
To-date the Financial Ombudsman Service has upheld most of the complaints about advisory CFD trading services. This was mostly for cases where clients where not informed by their broker advisers of the risks involved in trading CFDs or in cases where the FOS established that there would be remote possibilities of investors making a return from the service due to the rapid incurring of fees. The development follows a recent crackdown by the UK FSA.
In respect to the poor performance of many of the advisers under scrutiny, Tony Cross of IG Index noted that ‘the problem seems to stem from the fact that the ‘brokers’ who were managing funds for other people took a cut of each commission charged. By churning trades repeatedly, the brokers kept getting x per cent of the total commission charged. Naturally if you turn positions all the time in a market that’s not moving you’re not going to have any capital gain but your account value will be diminished.’
In 2008, the FSA forced spread betting and CFD provider Global Trader to cease operation after intervention, in the advent of unsustainable losses suffered by a handful of its corporate clients trading stock CFDs. More recently, in November 2010, the Financial Services Authority charged five principal executives of advisory broker Blue Index, with insider dealing.
The Financial Times reported that in an FSA review report made last year, it was found that many of the smaller advisory CFD brokers were not adequately qualified and providing discretionary services without authorisation.