Chapter CFM13130
| Published date | 16 April 2016 |
| Record Number | CFM13130 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
As they stand, the FSMA 2000 definitions - particularly those of ‘future’ and ‘contract for differences’ - are so wide that they would bring into the regulatory regime all sorts of contracts that no one would normally think of as investments.
For example, someone buying a house will usually sign a purchase contract, pay the purchase price, and take possession of the property at a later date. So between exchange of contracts and completion, the house buyer could be seen as holding a ‘future’ - rights under a contract for the sale of property, where delivery is to be made at a future date. Unless qualified, this might lead to the conclusion that all estate agents ought to be authorised by the FSA! The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI2001/544) limits the scope of these definitions for regulatory purposes.
FuturesA contract is not a future if it is made for commercial, rather than investment, purposes. A contract traded on a recognised investment exchange, or an OTC contract couched in the same terms, is automatically regarded as being for investment purposes. Any other sort of contract will generally be regarded as having a commercial purpose if it is intended to result in something being delivered.
OptionsOptions are limited to those which acquire or dispose of (broadly) financial assets, currency, or precious metals. It does not include, for example, an option held by a builder to acquire land.
Contracts for differencesContracts which are intended to result in delivery, deposits of money, and insurance contracts are all specifically excluded from being CFDs. Unlike futures, there is no investment versus commercial purpose test - all CFDs are regarded as investments.
The FSMA 2000 definition of contract for differences refers to a contract ‘the purpose, or pretended purpose, of which is to secure a profit or avoid a loss. ‘Pretended’ in this sense means ‘aimed for’ or ‘aspiring to’. It does not imply any fraud or deception.
“Contract for differences” is a term that has an ordinary commercial meaning and one that has been considered in the Courts. The essence this is a contract whose value depends on something else, but is not simply a wager. So a loss under a contract for differences should be legally enforceable.
The issues were considered by the Court of Appeal in the case of City Index Ltd. v Leslie (1991, 3 All ER 180). Mr Leslie entered into “spread...
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