INSIGHTS: FOS in the Derivatives Sector – Assessment For Opening A Client Trading Account

November 30, 2017

The Financial Ombudsman Service Australia (FOS) has released its Annual Review for 2016-17 which identifies emerging trends in consumer disputes in the financial services sector.

FOS identifies that it has experienced a 14% increase in the total number of disputes involving securities and derivatives in the past year.

For our derivative clients who operate in foreign exchange and interest rate products such as swap rates, options, warrants and CFDs (contracts for difference), Meridian draws your attention to several recent disputes which concerned whether a derivatives provider or broker undertook an adequate assessment of a client’s suitability to open a trading account.

Client Trading Account

The FOS Review refers to a case where an investor was deemed not competent to open CFD trading account.

FOS focused on the client’s suitability to open a trading account given the high-risk nature of the financial product.

FOS determined that the particular financial services provider’s method and quality of assessment of the applicant’s suitability to open an account and to commence trading was deficient and identified the following factors which were significant in forming its conclusion:

  • the client did not understand the operations or risks associated with the product;
  • the client had no knowledge or experience of trading; and
  • the client did not understand the processes and technologies associated with the trading platform.
  • The financial services provider used a questionnaire to evaluate the prospective client’s understanding and experience with the CFD product and scored three out of ten when he originally failed the first assessment.
  • Within five days of the first assessment, the client was reassessed and answers to four questions to test knowledge and suitability were simply amended using the applicant’s initials to make the changes.

Further, in following the standard procedure to open the trading account, the client agreed to the account terms and confirmed that he understood the product disclosure statement which outlined the risks of trading.

FOS determined, in favour of the client finding that the client had not contributed to his trading loss, in particular that:

‘We are not persuaded that a five-day period between the initial assessment and the second assessment was sufficient time for the applicant to have secured the knowledge and experience he required to trade in this high-risk product.’

“The client never demonstrated through his trading history that he understood the trading environment, why withdrawals were being made from his account, the concept of open and closed positions or when he was at risk of margin call.”

“There was no basis on which he could have reasonably been assessed as suitable to open a trading account of this nature and he had not contributed to his loss through his own actions’.

Lessons – Processes for Trading Account Opening Account

The position of FOS appears to be founded on the assumption that a financial services provider must take positive and substantively reliable steps to assess and confirm if prospective clients who open trading accounts are experienced and suitable investors who fully understand the significant risks associated with this type of trading.

It is not enough to subject a prospective client to a test for knowledge and suitability and not to assess the implications of a particular result or otherwise to rely on standard trading risk disclaimers disclosed in a PDS.

Meridian provides regulatory and legal advisory services in the derivatives sector, in particular in relation to client monies, operation of client accounts and client account opening procedures. If you require assistance in this sector please contact our Financial Services Principal Michael Bracken.


Disclaimer: This information is current as of December 2017. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.