Contents

Background ➲ Principles of Professional Trading

Inadequate Onboarding Practices

The Australian ASIC Regulations RG227

Novice Trader # 1 ➲ Loss of circa $100k in 2 weeks

Novice Trader # 2 ➲ $35k loss ???

Australian Consumer Guarantees

Potential Claim or Class Action

This is not the 1st time Plus500 has run into legal trouble ➲ Approved 2021 Class Action + Regulatory Fines

ASIC v AGM Markets Pty Ltd (in liquidation) (No 4) [2020] FCA 1499

ASIC Product Intervention Order 20-254MR (effective from 29 March 2021)

Background ➲ Principles of Professional Trading

A well-established approach used by professional traders is to adopt a disciplined risk management methodology such that the loss incurred in any one trade is limited to a very small percentage (typically 1-2%) of their trading capital.

What this effectively means is that when they are wrong about a trade the associated loss does not diminish their ability to learn from the trade, survive and trade into the future.

The method used to demonstate this concept is to compare the number of unsuccessful trades in a row a trader using disciplined risk management can endure, versus the number of unsuccessful trades a novice trader might typically encounter.

For the novice trader to have any chance to learn and grow their trading skills their ability to make numerous unsuccessful trades is key.

By managing the downside well professional traders (or those aspiring to become professionals) are able to navigate uncertain markets whilst preserving their precious trading capital.

Inadequate Onboarding Practices

Based on the below examples of novice traders we know about who have sufferred major losses after just a few trades, we can be fairly sure that the onboarding practices of these online trading platforms do not currently address each novice traders understanding and readiness to adopt a disciplined risk management methodology.

Please refer to RG 227.40 below, specifically (e) which required the trading platform to address the novice trader's "preparedness to monitor and manage the risks of trading.."

The Australian ASIC Regulations RG227

In order to protect novice traders, ASIC Regulation RG227 requires online trading platforms to assess traders understanding and skill before allowing them to trade high-risk leveraged instruments.

RG227 Over-the-counter contracts for difference: Improving disclosure for retail investors prescribes the following under Client qualification: Benchmark 1 addresses the issuer’s policy on investors’  qualification for CFD trading:

RG 227.40 An issuer should assess a prospective investor against qualifying criteria that address the investor’s understanding of and experience with the product.

For example, criteria should address the investor’s:

(a) Previous experience in investing in financial products, including securities and derivatives;

(b) Understanding of the concepts of leverage, margins and volatility;

(c) Understanding of the nature of CFD trading, including that CFDs do not provide investors with interests or rights in the underlying asset overwhich a position is taken;

(d) Understanding of the processes and technologies used in trading; and

(e) Preparedness to monitor and manage the risks of trading.

An issuer may determine the best method of conducting the assessment itself.

We consider that an online test, a face-to-face interview or a telephone interview would all be appropriate methods.

In any case, an issuer should document the assessment process in writing, and retain this assessment.

Unfortunately, it appears that the online assessment process of some trading platforms are inadequate to ensure traders actually understand what they are doing and are actually prepared to manage the risks of trading before they commence trading and risking their precious trading capital.

Here are some examples:

Novice Trader # 1 ➲ Loss of circa $100k in 2 weeks

The folowing facts have been extracted from the reported Australian Financial Complaints Authority (AFCA) Case # 742974.

Financial Firm

Plus500au Pty Ltd

Complaint

On 9 April 2020, the complainant opened a derivatives trading account online with the financial firm to trade foreign exchange and Contracts for Difference (CFDs).

Between 9 April and 21 April 2020, he deposited a total of $128,400 across 58 deposits all via credit cards.

During this time, he entered into 33 transactions, but suffered heavy losses particularly on 17 April 2020 when rollover adjustments of $50,215.78 were applied to his account and on 21 April 202when six WTI Oil positions were automatically closed due to insufficient margin a total loss of $86,851.86.

The complainant is seeking his net losses of $96,200.

The complainant‟s solicitor says the complainant was not suitable to trade CFDs and should not have been allowed to open an account.

Was the complainant suitable to trade CFDs?

The complainant was not suitable to trade CFDs and should not have been allowedto open an account.

Did the financial firm engage in unconscionable conduct?

The financial firm did not engage in unconscionable conduct.

Did the failure to properly assess suitability directly lead to the losses?

Had the financial firm properly assessed the complainant's suitability it would have either prevented the complainant from trading altogether or taken steps to ensure the complainant was suitable to trade before facilitating his exposure to a highly complex and volatile market.

The complainant was reckless in his trading approach and continued to borrow more and more funds to finance his trading and so it is fair he bears some of the responsibility for his losses.

Why is the outcome fair?

The outcome is fair in all the circumstances as both parties bear some responsibility.

Determination

This Determination is in favour of the complainant.

Within 28 days of the complainant accepting the determination, the financial firm must pay to the complainant $67,360 plus interest compounding annually …

The complainant’s initial application did not meet the qualification criteria

The complainant was introduced to the financial firm's trading platform by a friend who sent him a You Tube video of the financial firm's offering after a conversation they had about needing alternate income streams given their employment uncertainty in the COVID-19 environment.

In the application process the complainant declared on the account opening form he had never traded shares, bonds, commodities, OTC derivatives or exchange-traded derivatives.

He also declared he had no relevant professional experience or qualifications.

There is no dispute the complainant did not pass the six multiple-choice minimum qualification questions in the account opening form on the first two attempts.

The first attempt at the application process took approximately three and a half minutes to complete(3 of 6 incorrect), presumably as the complainant was required to input contact and identification details.

The second attempt at the six questions took 24 seconds(1 of 6 incorrect)and the last 14 seconds.

There is no prohibition on allowing multiple attemptsof any suitability assessment.

However, there is a requirement for the provider to have a reasonable basis to be satisfied a prospective client is suitable.

Given the application questions focus more on the features of CFDs as a product rather than assessing the applicant's understanding of relevant risks, solely relying on the complainant's self-assessment of their suitability is unlikely to be sufficient.

As a result of the above, the panel is not satisfied the series of answers provided rapidly to the multiple-choice questions could give the financial firm a sufficient basis to properly assess the complainant's understanding of CFDs as being adequate to make the complainant suitable to trade.

Novice Trader # 2 ➲ Loss of circa $40k in 3 trades

In this example, which occurred after the above example (evidencing that it appears that no changes were made to the financial firm's onboarding process as a result of the above findings by AFCA) Novice Trader # 2 failed their first attempt at passing the online test.

The audit log from their 2nd and 3rd attempts is summarised below.

The times from the audit log of Novice Trader #1 are shown by way of comparison.

Attempt 2

Novice Trader # 2: 47 seconds

Novice Trader #1: 24 seconds

Attempt 3

Novice Trader # 2: 9 Seconds

Novice Trader #1: 14 seconds

What does this show?

The above audit log summaries show that a Novice Trader can take the online test and if they fail, they can immediately retake the test (presumably retaining the memory of which questions they got wrong last time) or just randomly selecting different answers until they get the green light!

Without analysing the content of the questions to determine whether they actually test a Novice Trader's understanding, we can at a mimimum conclude that there is no time of enforced reflection and relearning.

It appears the Novice Trader is permitted to take the test again immediately.

It also appears that no consideration is required by the Onine testing process to be given to such an anomoly as a 9 or 13 second completion time.

Common sense would indicate that no person could take an online test about complex financial instruments and trading concepts and truly reflect upon the content of the answers within such a short timeframe.

It is more likely than not, the Novice Trader has just made a resubmission providing different answers without any thought as to what the answers actually mean.

It is not surprising to then discover that a number of Novice Traders encounter major losses shortly after commencing trading on the online trading platform.

Other Examples …

Please let us know about your experiences with Novice Trading on Online Trading Platforms (both good and bad) so we can share with these with the public.

Australian Consumer Guarantees

The Australian Consumer Guarantees are the promises +/or assurances that automatically apply (imposed as protection for consumers by Australian Consumer Law) to the sale of products and services to consumers in Australia.

Australian Consumer Guarantees apply regardless of anything the seller states to the contrary, including their standard terms + conditions, or warnings on their website or the place of purchase of the product or service.

Who is a Consumer?

From 1 July, 2021:

👨‍💻 A consumer includes any purchaser (including a business) where the purchase amount is less than a monetary threshold of $100,000 (previously the monetary threshold was $40,000); or

🏡 Consumers of goods or services (for any price) if the goods or services are of a kind ordinarily purchased for personal, domestic or household use; or

🚚 A vehicle or trailer purchased primarily for use in the transport of goods on public roads.

Scope of Protection

➲ Bundled products and services;

➲ Gifts with proof of purchase;

➲ Sale items;

➲ Online products and services bought from Australian businesses; and

➲ Second-hand products from businesses, taking into account age and condition.

Exceptions do apply.

Consumer Rights

If a business fails to deliver any of these guarantees, consumers are granted the following legal rights:

⚖️ Repair, replacement or refund

⚖️ Cancelling a service

⚖️ Compensation for damages & loss.

Consumer Service Guarantees

Services must be:

✅ Provided with acceptable care and skill or technical knowledge and taking all necessary steps to avoid loss and damage;

✅ Fit for the purpose or give the results that you and the business had agreed to; and

✅ Delivered within a reasonable time when there is no agreed end date.

Source: ACCC website.

Potential Claim or Class Action

Please complete our Incident Report to Support a Legal Claim and contact us if you have had similar experiences are interested in better understanding your legal rights + making a claim or being part of a potential class action where all attempts to amicably resolve the matter have been unsuccessful.

Breaking News: Class action filed on behalf of alleged victims of IG Markets contracts for difference (CFD) products - a type of financial product that has been described by the Federal Court as "financial heroine hits". This is the same product used by Plus500.

This is not the 1st time Plus500 has run into legal trouble
➲ Approved 2021 Class Action + Regulatory Fines

The following has been extracted from the article Class Action Suit Against Major Broker Moves Forward by Gabriel Sherman dated Oct 26 2021:

The Tel Aviv District Court has certified a class action lawsuit against publicly traded financial broker Plus500 (LSE: PLUS), thereby approving litigation.The claim alleges that the broker, who offers trading in such financial instruments as stock market indices, currencies and commodities, discriminately shut down trading for 90 minutes for corporate gain.

Judge Altuvia concluded:

"It seems that the decisions to pause trading were not symmetrical and on the face of it at this stage and it seems that they worked for the benefit of the company,” wrote Altuvia. "…despite the explanations attempted by Plus500 CEO Yevgeni Schtuckmeyster…it doesn't seem that there was a reasonable cause to differentiate between financial instruments based on the same asset."

The judge has ordered the company has 30 days to provide detailed data pertaining to this automated mechanism and its use over the last 7 years.

The attorney for the plaintiff, Adv. Hanoch Ehrlich of the Hadah Roth Shenhar Helfer & Co. law firm, said: “The ruling has local and international significance because Plus500 is a huge international conglomerate with branches worldwide managed by virtual trading in a similar way (subject to local regulation).”

This would not be the first time Plus500 has run into legal trouble.

In 2012, the company’s UK subsidiary, Plus500UK Limited, was fined £205,128 by the UK’s Financial Services Authority for failing to report 189,000 reportable transactions. Plus500 also settled with the Belgium Financial Services and Markets Authority in 2017 for €550,000 after allowing retail traders to speculate on financial markets without owning underlying stock.

Further Reading: Class Action Suit Against Major Broker Moves Forward by Gabriel Sherman dated Oct 26 2021 with the headline being "The Tel Aviv District Court has certified a class action lawsuit against publicly traded financial broker Plus500 (LSE: PLUS), thereby approving litigation."

ASIC v AGM Markets Pty Ltd (in liquidation) (No 4) [2020] FCA 1499

On 16 October 2020, the Federal Court ordered that AGM Markets Pty Ltd (AGM), OT Markets Pty Ltd (OTM) and Ozifin Tech Pty Ltd (Ozfin) pay a total of $75 million in pecuniary penalties.

Justice Beach handed down the penalty following his February 2020 decision that AGM, OTM and Ozifin had engaged in systemic unconscionable conduct while providing over-the-counter (OTC) derivative products to retail investors in Australia (20-048MR).

In providing general context concerning OTC derivatives and in considering the objective of general deterrence in setting penalties for the serious contraventions in this case, Justice Beach referred to ASIC’s product intervention proposals relating to CFDs in CP 322 and said:

[27] 'If I may say so, there is considerable merit in ASIC’s proposal, but of course these are policy matters outside my realm of influence. But what I can say is that if such measures had been in place, most of the egregious conduct and its consequences that was exposed in the present case would in all likelihood not have occurred.
…

[74] Further, as I discussed earlier in my reasons, the regulatory changes proposed are likely to result in a reduced risk of similar conduct being repeated in the future by other market participants or at least significantly ameliorate its scope or effect.'

ASIC Product Intervention Order 20-254MR (effective from 29 March 2021)

ASIC Regulatory Guide 272

ASIC Corporations (Product Intervention Order—Contracts for Difference) Instrument 2020/986

Extract from ASIC News: Read this before trading CFD's dated 11 November 2020.

ASIC has imposed conditions on the issue and distribution of CFDs to retail clients.

These conditions will be in place from 29 March 2021 to 29 September 2022, after which time they may be extended or made permanent.

Note: ASIC has hinted it is proposing to extend the temporary measure to 2031 effectively making it permanent.

These leverage ratio limits and other changes are being introduced after ASIC reviews conducted in 2017, 2019 and 2020 found that most retail clients lose money trading CFDs.

For example, during a volatile five-week period in March and April 2020, the retail clients of a sample of 13 CFD issuers made a net loss of more than $774 million.

During this period:

Over 1.1 million CFD positions were terminated under margin close-out arrangements (compared with 9.3 million over the full year of 2018)more than 15,000 retail client CFD trading accounts fell into negative balance owing a total of $10.9 million (compared with 41,000 accounts owing $33 million over the full year of 2018). Some debts were forgiven.

The results after the first 3 months of operation of the ASIC imposed conditions are summarised below:

The rules basically matched those which were put into place in the UK and Europe in mid 2018, although the UK has since gone further and banned crypto CFDs altogether.

Leading the regulator to its decision was a marked improvement in outcomes for retail clients trading FX and CFDs at Australia based Retail FX and CFD brokers after the new rules were enacted.

During the product intervention order’s first three months of operation, ASIC said it observed significant improvements in key metrics and indicators of retail client detriment from CFD trading – mainly, reduced retail client losses.

Retail clients made net losses of $22 million from CFD trading after the rules were enacted, according to ASIC – a reduction of 94% as compared to the quarterly average of $372 million in the year prior to the product intervention order.

Extracted from 21-060MR ASIC’s CFD product intervention order takes effect

The maximum penalty for a contravention of a product intervention order is five years’ imprisonment for individuals and substantial pecuniary penalties of up to $555 million for corporations.

If a court finds that a person has contravened a product intervention order, a retail client may recover the amount of loss or damage suffered because of the contravention.

Australian Client Reviews of Plus500: Average Rating of 1.3 stars from 5 based on 113 client reviews (as at 23 June 2022).

‍Social Sharing Image: Courtesy of Matteo Miliddi on Unsplash

Credits: This blog article was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This blog article is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.