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[July 2016]

Company soliciting gold CFD trade without license and not giving an agreed refund

The following case is about a trouble with a financial instruments company. After being solicited by a salesperson like "Gold trading is very lucrative", a consumer concluded a contract of gold CFD trading. However, the company did not obtain a license for commodity futures traders, and did not give an agreed refund.

Details of the inquiry

A salesperson visited my home and said "Currently, gold trading is very lucrative. I will introduce you a good company. How about investing your money?"

At first I declined the offer. After a while, I became interested in the trading because the gold price was rising at that time. Soon after I said to the salesperson "I have time to hear about the gold trading", another salesperson visited my home and induced me saying "It's very lucrative", etc. Then I concluded a contract with the company.

Later, the salesperson said "You can make more money if you invest more money". So I paid about 2,000,000 yen in total. Afterwards the salesperson said "We have suffered some loss. Please invest additional money". I began to feel suspicious of the business. I want to quit the trading and want the company to return my money.

(woman in her 60s, unemployed)

Summarized outcome

The National Consumer Affairs Center of Japan (hereinafter called "NCAC") checked the written contract given by the company, which described the trading as follows.

  • It is CFD trading of precious metals. Balance settlement or delivery settlement is made after negotiated transactions (reselling or repurchasing) between our company and the client according to client's request.
  • Settlement is made based on the total transaction amount as a result of negotiated transactions between our company and the client, in reference to fluctuations in the precious metals CFD trading market.
  • The rate of buying and selling shall be the price of each precious metal set by our company based on the price thereof at a commodity exchange.

In short, the business appeared to be fall under the category of over-the-counter derivative trading, a kind of "commodity CFD trading" where the difference between a selling or buying price at the time of starting transaction and a price at the time of reverse transaction is settled as gain or loss and settlement is made only by the difference (settlement on balance) with reference to prices and indexes of precious metals which are underlying assets such as gold.

A business of over-the-counter derivative trading may only be conducted by an entity which has obtained a license from the competent minister (Article 190 (1) of the Commodity Derivatives Act). When NCAC inquired the presiding ministry about the company's license, however, it was found out that the company did not obtain a license.

Based on these facts, NCAC informed the company that they probably conducted over-the-counter derivative trading without a license, and negotiated with the company about the inquired issue. As a result, they promised to refund the money by the end of the month, but the money was not refunded by the due date. NCAC negotiated with the company again. In order to make things more definite, the company and the inquirer signed an agreement stating that the company would make a monthly payment to the inquirer.

Still, the company failed to make a punctual payment. They just refunded a part of the promised money very late. It became difficult for NCAC to continue negotiations with the company. After a while, the inquirer informed NCAC that she decided to entrust the matter to a lawyer, using the signed agreement as evidence. Then NCAC concluded the consultation.

Difficulties

The company's business was CFD trading of precious metals such as gold and platinum. CFD is an abbreviation for "contract for difference".

CFD trading of commodities like gold and platinum has the following characteristics.

  • Trading ends with settlement on balance after reselling and repurchasing. (Actual commodities will not be handed over to consumers.)
  • A consumer deposits margin money to a company. The company conducts transactions, the value of which is dozens of times greater than that of the margin.

As above-mentioned, the company's business was a kind of commodity CFD trading and appeared to be fall under the category of over-the-counter derivative trading. A business of over-the-counter derivative trading, which is subject to the Commodity Derivatives Act, may only be conducted by an entity which has obtained a license from the competent minister.

Companies which obtained a license for commodity futures traders are listed on the website of the Ministry of Agriculture, Forestry and Fishery as well as on the website of the Ministry of Economy, Trade and Industry.1 The above-mentioned company did not obtain the necessary license. (The afore-mentioned websites also list companies which conduct or conducted commodity futures trading without a license and received a warning letter.2)

The commodity CFD trading allows transactions, the value of which is dozens of times greater than that of the margin deposited to the company. A big profit could be made, while a loss exceeding the margin could be made because neither the principal nor interest is guaranteed. It is high risk high return trading.

In order to prevent occurrence and spread of problems similar to the above, consumers need to be careful not to conclude a contract before understanding a risk level and a mechanism of trading. If solicited by a salesperson, consumers should confirm if the company obtained a license for commodity futures traders.

  1. 1 Refer to registered commodity futures traders listed on (the website of the Ministry of Agriculture, Forestry and Fishery) as well as those on (the website of the Ministry of Economy, Trade and Industry).
  2. 2 Refer to the warning on (the website of the Ministry of Agriculture, Forestry and Fishery), and commodity futures traders without a license (unregistered) listed on (the website of the Ministry of Economy, Trade and Industry)[PDF].
  3. (The above links navigate to pages in Japanese.)

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