Posted: 02/02/2024
Placing a spread bet is when you bet on the movement of a financial market. You do not purchase the underlying security or asset that you are betting on, you are instead betting on the direction that you think the price of the security or asset will go. These bets can be placed in relation to a variety of different securities and assets including forex, stocks, commodities and listed companies and can also be placed on indexes such as the FTSE 100.
Spread bets are a leveraged product. This means that you are able to make a bet where the amount you deposit (known as the margin) is less than the value of your position on the market. The impact of this could go both ways – you could end up winning much more than you invested but you could also end up losing a great deal more than your original investment.
Contracts for difference, known as CFDs, are similar to spread betting in that you are betting on the value of the underlying security without owning it. CFDs allow you to trade on the price movement of the underlying security or asset over a short period of time – namely from open to closing trades. As with spread betting, CFDs are a leveraged product.
If you are a retail client, when entering into a spread bet or CFD, you should be provided with a 'Key Information Document', which is also referred to as a KID. This is a short document which will be no more than three sides of A4 and which focuses on the key information that retail clients need to understand the product concerned. The KID must contain the following information, under the headings specified below:
When you first set up an account to trade, you will be classified as either a professional client or a retail client. Professional clients are either ‘per se professional clients’ which include entities and companies who meet certain criteria set out by the Financial Conduct Authority (FCA) or ‘elective professional clients’ which can be individuals or entities who meet certain criteria set by the FCA.
A retail client is a client who is not a professional client or is not an eligible counterparty. Generally, if you are an individual who has no or limited experience with trading, have carried out only small transactions, have a portfolio of financial instruments and cash of less than €500,000 and have not worked in the financial sector, then it is likely that you will be a retail client.
Under the FCA rules, retail clients are given the greatest level of protection, more than is available to professional clients. Retail clients have to be provided with more information about any transactions, platform costs, commissions, fees and charges and they will also receive negative balance protection (see below). The information provided must be accurate, fair, clear and not misleading (this applies whether the client is retail or professional although the communication should take into account the nature of the client) and has to be set out in language that is clear, succinct and comprehensible.
Professional clients will normally have access to more favourable rates and benefits such as greater leverage but in turn will waive their right to some of the protections that are available to retail clients (including negative balance protection). This is because they are assumed to be capable of understanding the risks involved and making their own decisions about investments.
Negative balance protection is a protection put in place by the FCA. It means that the liability of a retail client for any restricted speculative investments (which includes spread bets and CFDs) connected to their account will be limited to the funds in that account. Therefore, the retail client cannot lose more than the funds held in their account relating to such investments, even if the actual losses incurred are greater. This protection is not automatically available to professional clients.
It is possible to request to change from retail to professional client status. However, in order to do so, the trading platform provider must:
If you have traded in the UK on an online platform, you may have been misled about the risks, costs, or product details of spread betting and CFD trading. You may have also been given inaccurate or incomplete information about the markets offered or the potential performance of your trades. If this is the case, you may be entitled to claim compensation from the trading platform provider for any losses or damages that you have suffered as a result of their breaches, negligence or misconduct.
Our specialist group action litigation team are investigating claims against online trading platforms for potentially misleading information about the risks, costs, or product details of spread betting and CFD trading.
Our team are investigating claims against online trading platforms on behalf of online traders who changed classification status but did not meet the requirements to become a professional client or were not informed of the potential risks.
Find out more and send an enquiry from our Online trading retail to professional classification claim page.
For more information about our specialist group action litigation team and details of some of the group actions we are currently investigating, please see our group action litigation page.
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