Peter Quinn v IG Index Ltd

Hearing dates: 20 – 23 August 2018

HH Judge Pelling QC:

Introduction

Between March 2010 and June 2014, the claimant placed spread bets with the defendant first on particular shares and then on stock market indices here and abroad during the course of which he lost over £2 million. Although the claim has been pleaded in a number of different ways, at trial his claim was that he had been induced by the employees of the defendant to spread bet and encouraged to continue to spread bet when it was neither appropriate nor in his best interests to do so. It is alleged that by such conduct the defendant acted in breach of statutory duty under s.138D(2) of the Financial Services and Markets Act 2000 (“ FSMA”) and that in consequence he is entitled to recover some or all of the losses he made over the period that he placed spread bets with the defendant. The defendant denied that it owed a duty to do anything other than assess whether spread betting was appropriate for the claimant, that it had not breached its duty by assessing spread betting as appropriate for the claimant and in any event the losses claimed were not in law caused by the alleged or any breach of duty by the defendant.

The trial took place between 20 and 23 August 2018. I heard oral evidence adduced on behalf of the claimant from:

(a) The claimant;

(b) Mr. Gary Chong, a friend of the claimant, who was employed as a stock broker by WH Ireland until 2013, who acted for the claimant in relation to some share dealing and who introduced him to the defendant; and

(c) Mr. Mark Rabone, another of Mr. Chong's clients who he introduced to the defendant.

I heard oral evidence adduced on behalf of the defendant from:

(a) Ms Bridget Messer, a director of IG Group Holdings Limited, the ultimate holding company of the defendant and the IG Group's Chief Commercial Officer;

(b) Mr. Tim Howkins, who was the Chief Executive Officer of IG Group Holdings Limited during the period material to these proceedings;

(c) Ms Agnes Skibniewski, who is employed by the defendant as its Market Data Supervisor but who at the time material to these proceedings was employed by the defendant as an Account Set Up and Rebates Assistant in the department of the defendant that handled the opening of new accounts;

(d) Mr. Ryan Arnold, a Credit Risk Supervisor employed by the defendant;

(e) Mr. Robert Dunne, a Marketing Technology Technical Manager employed by the defendant;

(f) Ms Lucy Foot, who is now a qualified solicitor and a legal Counsel employed by the defendant but in 2010 was employed in the department of the defendant concerning with the setting up of introducing broker contracts;

(g) Ms Niamh Byrne, one of the defendant's sales and client managers,

(h) Mr. Matt Brief, a Dealing Director employed by the defendant; and

(i) Mr. Michael Murray, who was employed by the defendant in 2010 as its Head of Premier Trading but who is now retired.

Background

Financial Spread Betting

Financial spread betting is a bipartite contract for differences between a person wishing to bet (“bet placer”) and a spread betting operator such as the defendant by which the bet placer can bet on the forward movement of securities, commodities, foreign currency values relative to other currencies or market indices by notionally “buying” or “selling” against a spread between a low fixed figure (“floor”) and a high fixed figure (“ceiling”). If the bet placer “buys”, he or she is betting that the relevant market will rise higher than the ceiling and if he or she “sells” that it will fall below the floor. The concepts of “buying” and “selling” when used in a spread betting context are artificial because in truth the bet placer does not buy or sell anything.

How the bet is denominated depends on the subject of the bet. If what is being bet on is the movement of a share then typically the bet will be denominated in £x per penny (or cent) of share price movement upwards or downwards depending on whether the bet placer is buying or selling. If the bet placer is betting on the movement of a market index such as the FTSE 100 Index, the bet will typically be denominated in £x per point by which the index moves below the floor for a seller and above the ceiling for a buyer. If there is no movement then the bet placer will lose his initial bet.

The defendant makes its profits by adding a margin to the spread. Mr. Murray explained the mechanism in his statement by an example:

If the client was being charged 15 basis points each way (i.e. 15 basis points on opening the trade and 15 basis points on closing the trade) that would be 30 basis points overall, which equals 0.3% of the total consideration of the underlying trades. Therefore, for example, if a client was buying 100,000 Vodafone shares, IG would charge 0.3% of the consideration of the position. The consideration of the position would be calculated as the number of shares multiplied by the share price so for example 100,000 multiplied by a share price of £1.80 would be 180,000. The commission in my example would be 0.3% of the consideration, so 0.3% multiplied by 180,000 would be £540.

Two consequences flow from this – first, the client is not betting against the service provider so that no conflict arises and secondly the service provider is paid whether the client wins or loses so the service provider has no interest in whether the client wins or loses other than that if the client wins he or she is likely to continue betting.

This form of dealing has very serious downside risks for the bet placer. If the market concerned is for example the FTSE 100 Index, and it falls 100 points beneath the floor, a bet placer who is a buyer will be £100 worse off for every £1 per point of movement bet. If the bet is at £10 per point then the loss will be £1,000 and if the bet is £100 per point, the loss will be £10,000. Subject to closure of a bet, as to which see further below, the only cap on loss making is the relevant index or share or commodity price falling to nil.

There are collateral advantages to spread betting on securities, which include not having to purchase the securities concerned thereby reducing the amount that has to be invested at the outset of a speculation (something that would otherwise operate as a restraint against over exposure) and not having to pay stamp duty on the purchase of the shares, because no shares are bought. No capital gain tax is payable on any profits made from spread betting.

The gain or loss is crystallised when the bet is closed. This can happen in a variety of ways. The bet placer may agree with the spread bet operator to hold an open position for a fixed period of time. It may be that the bet placer wishes to take advantage of some gains that have been made while holding an open position or it may be that he or she enters into a stop loss arrangement with the spread betting operator concerned to the effect that the position will be closed in the event that there is an adverse move beyond pre-fixed parameters. Finally, spread betting operators reserve the right to close loss making positions where the losses exceed the proportion of loss covered by the bet placer's deposit and margin – something I refer to in more detail below.

Spread betting operators in general will hedge, and the defendant in particular hedges, bets both internally and externally. In consequence the defendant argued and I accept that the bet placer placing spread bets with the defendant is not betting against the defendant thereby eliminating at least that potential conflict of interest between a bet placer and the defendant. Although the degree to which the defendant hedges bets placed with it was questioned in cross examination, in my judgment it is almost self evident that a spread bet operator will operate in this manner since otherwise it would be exposed to enormous and unsustainable risks. Although the defendant's witnesses implied that the defendant adopted a hedging programme in order to avoid a conflict of interest with its customers, in my judgment the predominant purpose was to avoid the commercial risks I referred to above. I also accept the point made on behalf of the defendant that the primary method of hedging is by notionally setting off bets by different bet placers betting in opposite directions in the same market and externally hedging any potential losses not covered by this method. This too makes obvious commercial sense since it minimises the defendant's costs of operating its hedging programme.

The spread-betting operator will manage, and the defendant manages, its only real risk (that the bet placer will not be good for his or her losses) in part by requiring bet placers to deposit a relatively modest proportion (in the case of the defendant typically 10%) of his or her cumulative bet values (referred to either as a deposit or “margin”) with the spread-betting operator and to require that the bet placer maintain that minimum sum on deposit by requests for additional margin (known as “ margin calls”) in respect of losses incurred by open positions. In default of a positive response to a margin call, the spread-betting operator will close some or all of the bet placer's positions in order to control its credit risk. In the case of the defendant, the degree to which a bet placer is permitted to suffer losses on open positions in excess of those covered by his or her...