Investment opportunities? Easy money? Contracts for Differences?
How do shady brokerages make profits?
Can defrauded investors take legal actions?
You might have invested in forex, gold or some other investment opportunity through an unreliable securities dealer and ultimately lost money. Or if not, you must have heard about people losing money to a brokerage.
In our experience, investors who partner with an unreliable brokerage company get defrauded all over the world on a daily basis. The fraud victims are in all likelihood less experienced traders. The more investors take time to learn about the process and do their due research beforehand, the less they are likely to be engaged in trading through vague brokerages.
No matter what you do for living, you have probably seen an ad promoting investment in forex, crypto, gold or other securities from a company you have never or barely heard of or seen while scrolling on your social media platforms. These kind of companies point out an easy registration and conditions that seem too good to be true, calling attention to multiple investing opportunities. If you decide to invest, there is a big chance that you will end up trading mainly through instruments called Contracts for Differences (CFDs).
A CFD is a legally binding financial contract between an investor and a broker that defines payments of the differences in the settlement between the open and closing trade prices.
CFDs also allow investors to get involved in directional trading of securities. This means that investors make assessments of the direction based on their view of the future direction of the market. Such assessment is the sole determining factor in whether the investor decides to sell or buy. CFDs are particularly popular in forex (FX) and commodities products.
Therefore, CFD investors do not own the asset in question, but rather receive revenue based on the price change of that asset within the established timeframe. For example, instead of buying or selling actual gold, traders simply speculate on whether the price of gold will go up or down. If traders are successful at the assessment, they earn profits, and if not, they lose the invested money. The CFD’s value considers only the price fluctuations, i.e. the difference between the opening and closing trade price.
Investing companies who act as brokers offer investment advice to their clients and “manage” the invested money. Given such position and the expertise surpassing that of a client, it is a very common occurrence that clients get defrauded. The fraud victims are mostly clients who have little experience in trading and trust their brokers to help them on the journey, yet quite often they do just the opposite. Vague investing companies use clients’ downfall to get the profits.
When defrauded clients learn they have been scammed and want to put an end to it, in most cases they address the investment company with the request to have their money returned and the brokerage gives a negative response referring them to the Terms and Conditions. Since the clients had ticked the boxes as a sign of consent, they often believe there is nothing left to do.
However, such terms and conditions are many a time contrary to binding regulations. We have observed on websites of a few investing companies we shall not name that every advice given is considered to be a promotional material, which is contrary to the very essence of trading. Yet, as per our experience, it seems that those companies have a little to no regard for the regulations they fall under.
Therefore, the key question here is
Can an investment company hide behind its terms and conditions contrary to binding regulations regarding CFDs?
And the answer is
NO, IT CANNOT!
The regulations governing CFDs are established by regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK, the Securities and Exchange Commission (SEC) in the US, or the Cyprus Securities and Exchange Commission (CySec) which is also eligible for many EU countries. These regulations must be followed by investment companies operating in respective jurisdictions.
While investment companies may have their own terms and conditions for the CFD products they offer, those cannot contravene or override the regulations set out by the relevant regulatory body. If that is the case, the regulatory requirements take precedence.
Lastly, it is important for investors to understand the terms and conditions of any investment product they are considering, including CFDs, and ensure that these comply with applicable regulations. Even if they accepted them, it does not mean the investment company is not liable for breaching mandatory regulations. If an investor or a trader has concerns about practices of a certain investment company, they can contact the relevant regulatory body and experts for assistance. Legal actions can be taken!
Miloš Vučković, Senior and Managing Partner
Aleksandar Čermelj, Associate
*The information in this announcement does not represent legal advice and is provided for general informational purposes only.
**Partner, Senior Associate and Associate refers to Independent Attorney at Law in cooperation with IVVK Lawyers.