Derivative Trading and Unsuitable Clients
A recent ruling by the Australian Financial Complaints Authority (AFCA) highlights the potential liability of financial firms when opening accounts for unsuitable clients. In a case where a complainant suffered significant losses from derivative trading, AFCA found that the client was not suitable to trade contracts for difference (CFDs) and should not have been allowed to open an account.
A financial firm could be held liable to their clients where it is found that the firm should not have opened an account for the client according to a May 2021 ruling by the Australian Financial Complaints Authority.
The Case
In a case heard by the AFCA, in April 2020, the complainant opened a derivatives trading account online with the financial firm to trade foreign exchange and contracts for difference (CFDs).
He deposited close to $130,000 over 58 deposits all via credit cards. During this time, he entered into 33 transactions but suffered heavy losses. His losses were particularly large on two separate dates: on April 17th, when rollover adjustments of more than $50,000 were applied to his account and on April 21st when six WTI Oil positions were automatically closed due to insufficient margin at a loss of $86,000+. The complainant sought compensation of $96,200.
In the case, the complainant’s solicitor said that the complainant was not suitable to trade CFDs and should not have been allowed to open an account.
In response, the financial firm said the complainant passed its suitability process. It further says it provided an execution-only platform and the complainant’s losses were due solely to the investment performance of his positions. The financial firm further said the complainant opened a number of chargebacks with his bank totalling $44,200 which reduces the maximum amount of the claim to $84,200.
Key Findings
AFCA found that the complainant was not suitable to trade CFDs and should not have been allowed to open an account. However, AFCA found that the financial firm did not engage in unconscionable conduct.
AFCA also found that the complainant was reckless in his trading approach and continued to borrow more and more funds to finance his trading. However, had the financial firm properly assessed the complainant’s suitability it would have either prevented the complainant from trading altogether or had taken steps to ensure the complainant was suitable to trade before facilitating his exposure to a highly complex and volatile market. AFCA ruled that both parties bear some responsibility.
Determination
The determination was in favour of the complainant, with the financial firm being required to pay to the complainant $67,360 plus interest.
Contact Financial Dispute Legal
If you are worried that a financial firm may have failed to assess your suitability to trade foreign exchange and/or CFDs FD Legal is here to help. You can call us at 1300 433 533 or email us at enquiry@fdlegal.com.au.
