By Stuart Washington
INVESTORS should be banned from trading contracts for difference unless they prove they can handle the highly complex derivatives, the Financial Ombudsman Service (FOS) has said.
The call for a ban in the FOS's annual review goes beyond the independent complaints body's earlier written submission to the corporate regulator asking for comprehensive education to protect investors.
''In our experience, the only investors who trade in CFDs successfully are sophisticated traders who watch and manage their investments full-time,'' the FOS stated in its review.
In the review, the FOS raised the need for CFD traders to obtain a certificate from an accountant or financial planner to show they are competent to trade CFDs.
The FOS's investments ombudsman, Alison Maynard, said in an interview: ''We think a certificate from an accountant or an AFSL holder [financial planner] would be an appropriate safeguard.''
CFDs are a controversial investment product that have been described by the Australian Securities and Investments Commission as ''much riskier than a flutter on the horses or a night at the casino''.
On its investor education website, ASIC states: ''Put simply, CFDs are like borrowing to gamble.
''You take a punt, with borrowed money, on whether a share price or market index will go up or down.''
Ms Maynard said the FOS saw cases because CFD providers only needed to provide ''general advice'' about the product and not take into account the personal situation of the investor.
''The CFD provider is not in the position of being a financial adviser who has to take personal circumstances into account,'' she said.
''The problem we see is that sometimes they [investors] don't have a case they can win at FOS, but they have still suffered substantial losses and didn't understand the risks they were taking on,'' she said.
The FOS's annual review for last year said of 54 complaints it had received in derivatives and hedging, half related to CFDs.
ASIC's approach, foreshadowed in a November consultation paper, focuses on CFD providers meeting a regime of disclosure against a set of benchmarks.
In its submission, Australia's largest CFD provider, IG Markets, has said it ''supports all steps taken to better protect and inform retail CFD investors''.
Comment on the FOS's stance was unavailable from IG Markets yesterday.