How to defend yourself against unfair practices of brokerage companies?
Author of the article: ARROWS (Mgr. Jáchym Petřík, office@arws.cz, +420 245 007 740)
This article was written in 2022. If you are looking for up-to-date information on this topic, please do not hesitate to contact us at office@arws.cz or by phone at +420 245 007 740. We will be happy to advise you.
If you have found yourself in a situation where you have fallen for a brokerage company trying to extract money from you, we offer you a solution to "get out of it".
As hopeless as the situation seems, our legal system gives defrauded investors a wide range of legal protections. The legal regulation of the provision of capital market services and the protection of the capital market and investors can be found in Act No. 256/2004 Coll., on Capital Market Business, as amended (the "Capital Market Business Act" or the "CMBA"), in particular in the section on "dealings of a securities dealer with investors".
Foreign securities trader
The rogue securities dealers ("brokers"; hereinafter referred to as "OCPs") that we discussed in the previous article are often based outside the Czech Republic, usually in Cyprus.
One of the practices of foreign OCPs is to discourage investors in the position of consumers from pursuing their claims through the Czech public authorities. The Czech National Bank's (CNB) supervision of foreign persons under the Capital Market Undertakings Act is indeed limited and is divided between the Czech National Bank and the supervisory authority of the OCP's home state. However, for deluded investors, it is crucial that compliance with the rules on dealing with customers and retention of documents and records (see below) is generally always within the jurisdiction of the Czech National Bank.
The same applies to the possibility of recovering damages (amounts invested) before public authorities, as described below. If the OCP provides its services on the territory of the Czech Republic, consumers have the possibility to apply to Czech courts or to Czech out-of-court protection authorities.
The point is that foreign brokers can, in principle, do business in the Czech Republic through a branch office, a tied agent or provide services cross-border. This determines the different scope of the CNB's supervision. For example, for a branch of a foreign broker, the CNB's supervisory authority is defined in Section 24(5) of the ZPKT.
The good news for most clients is that it is essentially irrelevant whether you have a broker directly based in the Czech Republic or a broker with a seat and regulation elsewhere in the European Union (most commonly Cyprus) and the same or similar principles apply to these brokers, which we will describe in this article. Thus, if the broker in question is doing business in the Czech Republic but is from, for example, the aforementioned Cyprus, you can exercise your rights in the same way as if it were directly supervised by the CNB. The important thing is that such a broker is regulated, and then you can claim your damages against the dishonest broker, no matter in which EU country it is headquartered. The important thing is that the broker is actually doing business in the Czech Republic, i.e. actively targeting Czech citizens. Then the jurisdiction and competence of the Czech courts, hence the financial arbitrator, is established, which is the alpha omega. Of course, we are talking about consumers.
Even so, in some cases, misled investors do not avoid dealing with foreign persons. We therefore recommend that you contact experienced legal advisors at the outset of filing a claim with OCP, who will be able to assist you and will take over all communication, including the recovery of the claim, for you.
General breaches
The basic obligations of an OCP are set out in Section 15(1) of the Securities Trading Act as follows: 'A securities dealer shall provide investment services with professional care. In particular, the provision of investment services with professional care means that the securities dealer acts competently, honestly and fairly and in the best interests of customers, in particular fulfilling the obligations set out in this section."
This provision represents the basic concept of an OCP's dealings with customers and is therefore referred to as the "general clause". It is a statement of a general rule as to how an OCP should behave towards its customers and the General Clause can therefore be used wherever a breach of a more specific rule in the Capital Market Undertakings Act cannot be found to justify improper conduct by an OCP.
It is important to note here that this provision is by no means toothless. Breach of the obligation to provide investment services with professional care is punishable by the CCCPA as an offence for which an OCP may be fined generally up to CZK 150,000,000 or 10% of its total annual turnover.
Another provision that should be of particular interest to deluded investors is Section 15h of the ZKPT. Here, the Capital Market Undertakings Act defines the penumbra of information that every OCP should request from its customers.
The OCP is obliged to obtain information from the customer about his a) investment expertise, b) investment experience, c) financial background and d) investment objectives (Section 15h(1) of the CCPA).
According to the provisions of Section 15h(2) ZKPT, "The information referred to in paragraph 1 shall be obtained by the securities dealer to the extent that it enables the securities dealer to assess whether the provision of the investment service referred to in paragraph 1, the provision of advice on an investment instrument or the execution of a trade in an investment instrument in the context of the investment service referred to in paragraph 1 is appropriate to the customer's financial background, investment objectives and the expertise and experience necessary to understand the risks involved."
Dishonest OCPs, or "scammers" as we called them in the last article, mistakenly believe that this obligation of the Capital Market Business Act can be satisfied by simply sending and receiving a completed "investment questionnaire" in which the investor answers a few often vague questions from the above categories.
This is not the case. Section 15(h)(2) is not self-explanatory and serves to enable the OCP to tailor the products offered according to the 'investment questionnaire' completed by the customer. Otherwise, it would be acting contrary to law.
The still applicable Securities Commission Decision KCP/14/2005 states the following on the determination of the customer's investment profile: "If a securities dealer requests information from customers about their experience, financial situation and intentions, but fails to evaluate this information and select an appropriate strategy on the basis of it, it is acting contrary to the law."
And further, Decision KCP/4/2005 on offering an aggressive strategy to a conservative customer states the following: "A broker-dealer is not obliged to provide services for all investment instruments, but if it offers inappropriate, aggressive strategies to customers who are not interested in aggressive trading and are classified as conservative on the basis of the data they provided in the investment questionnaire, it is acting in breach of the law."
Offering Difference Contracts
OCPs offering customers to enter into so-called difference contracts (or also CFD contracts, the nature of which we explained in the previous article) are often in conflict of interest, especially in cases where the CFD contract is the only type of instrument in the broker's (OCP's) portfolio. Acting in conflict of interest is an institution to which the Capital Market Undertaking Act pays considerable attention, as it is a completely flagrant violation of the so-called general clause of OCP's dealings with customers, as mentioned above.
The OCP should avoid acting in a conflict of interest and comply with the rules contained in particular in Section 15c in relation to retail investors without reservation.
Section 15c(3) of the ICA targets the internal affairs of the OCP and imposes an obligation on the OCP to ensure that, when providing investment services, it does not reward or evaluate the performance of its employees and tied agents in a manner that encourages such persons to offer certain investment instruments even though they do not meet the needs of the client.
Section 15c(4) of the ICA provides for the obligation of an OCP to assess a sufficient number of investment instruments available on the market, which are sufficiently diverse in terms of their type and issuers or persons who create investment instruments, so that the investment objectives of the customer can be adequately met.
On the one hand, this provision of the Capital Market Undertakings Act develops the obligation of an OCP to rely on the information provided by the investor in the investment questionnaire when offering or recommending an investment instrument (e.g. CFDs). At the same time, Section 15c(4) sets out rules to prevent the OCP from coming into conflict with the interests of customers (investors).
Further requirements for the assessment under paragraph 4 are regulated by Article 53 of the Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 (Section 15c(6) of the OCCP).
According to Article 53(2)(c) of Commission Delegated Regulation (EU) 2017/565 of 25 April 2016, an OCP shall ensure that its service is suitable for each new customer before providing the service, as its business model matches the needs and objectives of the customer and the range of financial instruments is appropriate for the customer. If this is not the case, the OCP will not provide the service to that customer.
How to get out of this
So, if you have been in a situation where "your" broker has extracted money from you through aggressive practices or disregarded your best interests, there are legal remedies that can be relied upon to compensate you for the damage so caused. Even so, many retail investors may be put off by the cost and length of any litigation. However, the legislator has also thought of these situations.
According to Section 1(1)(h) of Act No 229/2002 Coll., on the Financial Arbitrator, as amended (the "Financial Arbitrator Act"), "A financial arbitrator is also competent to decide a dispute otherwise falling within the jurisdiction of the Czech courts if it is a dispute between a consumer and a person providing investment services in the course of providing investment services."
Unlike court proceedings, proceedings before a financial arbitrator are fee-free. Thus, there is no fee for initiating proceedings before a judicial arbitrator and each party to the proceedings bears its own costs, which can substantially eliminate the economic consequences of losing.
The Capital Market Undertakings Act also facilitates the evidentiary position of investors, as it imposes a number of obligations on OCPs to keep records and documents relating to investment services and transactions sufficient to enable them to monitor compliance with the requirements under the Act (in particular under the provisions of Section 17 of the CMA). These records include records of telephone calls or electronic communications.
Violation of the obligation to keep records and documents relating to investment services and transactions gives rise to liability for an offence and, in general, can result in a fine of up to CZK 150,000,000, so OCPs are sufficiently motivated to keep the relevant records and documents and to produce them to the Financial Arbitrator on request.
The previous article "Thenew risks of investing, or "scumbags" on the capital market" was not very positive and described particularly unpleasant situations into which anyone can (very!) easily fall. We are pleased that we can now also outline a number of ways to survive these difficult tests.
In all cases, you can't go wrong by approaching a law firm that has experience with the Capital Market Enterprise Act. It will be an investment you will not regret.
Having said that, the capital market offers a convenient way for even small and inexperienced investors to make an interesting value for their funds. It is very important to pay due attention to choosing a broker who will be your long-term partner, provide you with good trading conditions (low fees, fair swaps) and a quality trading platform through which to trade. We will look at how to find such a broker in the next article.