Can a Forex Broker Give Trading Advice Under an Execution-Only Agreement?

Many Forex and CFD clients sign agreements stating that the broker provides an “execution-only” service.

In simple terms, this normally means that the client makes the investment decisions and the firm executes the orders.

But what happens when the written agreement says “execution-only”, while an account manager is regularly telling the client:

• which asset to trade;
• whether to buy or sell;
• how much money to invest;
• when to open or close a position;
• not to close a losing trade; or
• to deposit additional funds in order to recover previous losses?

That distinction may become highly important in a subsequent dispute.

What Does “Execution-Only” Mean?

Under MiFID II, different investor-protection obligations apply depending on the investment service being provided.

Where investment advice is provided, the investment firm must assess whether the recommendation is suitable for the client, taking into account matters including the client’s objectives, financial situation, ability to bear losses and risk tolerance.

For non-advised services involving complex products, an appropriateness assessment may instead be required. This generally focuses on whether the client has sufficient knowledge and experience to understand the risks involved. ESMA describes these requirements as an important part of investor protection for services other than investment advice or portfolio management.

The narrower “execution-only” exemption is available only where specific MiFID II conditions are satisfied.

What if the Account Manager Recommends a Trade?

The contractual description of the service is important, but so is what actually happened.

Consider the difference between the following statements:

“Natural gas is trading at this price today.”

and:

“Buy natural gas now, open a position of this size and keep it open until I tell you to close.”

The first may amount simply to market information.

The second may raise a substantially different issue.

The same applies where an account manager tells a client:

• “sell this asset now”;
• “increase your position”;
• “do not close the trade”;
• “deposit another EUR 20,000 so we can recover the loss”.

The precise circumstances and communications matter.

Who Actually Initiated the Trade?

This can become one of the most important evidential questions.

The broker may argue that the investor personally clicked the “Buy” or “Sell” button and therefore made the decision independently.

But that may not tell the complete story.

The investor could have been on the telephone with an account manager giving detailed instructions immediately before the order was placed.

ESMA has specifically emphasised the importance of firms keeping records capable of showing whether a transaction genuinely originated from the client’s initiative or the firm’s initiative.

That can make call recordings, WhatsApp messages, emails and platform communications particularly important evidence.

Advice to Buy, Hold or Sell Can Matter

Investment advice is not necessarily limited to telling someone what to buy.

ESMA has explained in the suitability context that relevant recommendations can concern decisions whether to buy, hold or sell an investment.

This matters in Forex and CFD disputes because account managers may become involved after a position has already been opened.

For example, a client may wish to close a losing trade but be told:Do not close it. The market will reverse.

If that statement forms part of an ongoing pattern of personalised recommendations, the nature of the service actually being provided may require closer examination.

The “Deposit More to Recover” Problem

The issue becomes particularly serious where advice is linked to additional deposits.

After suffering a loss, the investor may be told that additional funds are required to:

• protect the account;
• provide margin;
• prevent existing positions from closing;
• open a recovery trade;
• recover previous losses.

The sequence may become:

loss → recommendation → additional deposit → new trade → further loss.

In such circumstances, the analysis should not be limited to the final unsuccessful trade.

The complete chronology of communications, deposits and transactions should be examined.

For a more detailed discussion of this pattern, see:

The Recovery Trade Trap: When Forex and CFD Investors Are Pressured to Deposit More After Losses.

CFDs and Appropriateness

CFDs are complex financial products.

For non-advised services involving complex products, MiFID II generally requires firms to obtain information concerning the client’s knowledge and experience in order to assess whether the product or service is appropriate. If insufficient information is provided, or the product is considered inappropriate, the client must receive the relevant warning.

CySEC has also directed Cyprus Investment Firms to ESMA’s supervisory guidance concerning appropriateness, execution-only services and suitability.

The description “execution-only” therefore should not be understood as meaning that all investor-protection obligations automatically disappear.

What Evidence Should Investors Keep?

Where the relationship between the investor and account manager becomes disputed, contemporaneous evidence can be crucial.

Investors should preserve:

• WhatsApp and Telegram messages;
• emails;
• platform communications;
• call records and recordings where legally available;
• complete trading statements;
• deposits and bank transfers;
• withdrawal requests;
• the client agreement;
• terms and conditions;
• appropriateness questionnaires;
• risk warnings;
• suitability documentation, if any.

Particular attention should be given to communications immediately before major deposits or trades.

A useful chronology may be:

communication → recommendation → deposit → trade → result.

Why the Written Agreement Is Not the End of the Analysis

A clause stating that the service is “execution-only” is plainly relevant.

However, where the factual conduct appears inconsistent with that description, the actual interaction between the firm and the client may also need to be examined.

Relevant questions may include:

• Was the client receiving personalised recommendations?
• Who selected the relevant instrument?
• Who suggested the direction of the trade?
• Who determined the position size?
• Was the investor advised to hold or close positions?
• Were additional deposits recommended?
• Did the firm document whether the transaction was initiated by the client?
• Was an appropriateness or suitability assessment carried out where required?

ESMA’s supervisory guidance specifically considers how firms ensure that clients understand whether a service is advised or non-advised and what safeguards exist to prevent advice being provided inadvertently without the necessary suitability assessment.

Conclusion

An execution-only agreement does not mean that the factual relationship between a Forex or CFD firm and its client becomes irrelevant.

Where an account manager merely executes instructions given independently by the investor, the position may be straightforward.

Where the account manager repeatedly recommends what to buy or sell, how much to invest, whether to hold losing positions or whether to deposit further funds, a different legal and regulatory analysis may arise.

The central question is often simple:

Was the investor genuinely making independent trading decisions, or was the firm effectively influencing or recommending those decisions?

The answer will depend on the contractual framework, the precise communications between the parties and the available evidence.

For further information on Forex and CFD-related disputes, see: Forex & CFD Broker Fraud in Cyprus: 10 Red Flags and How Investors Can Recover Their Funds