R London Capital Group v The Financial Ombudsman Service Ltd Mr Jeremy Shrubbb and Another (Interested Parties)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Leggatt |
| Judgment Date | 02 August 2013 |
| Neutral Citation | [2013] EWHC 2425 (Admin) |
| Docket Number | Case No: CO/6822/2012 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 02 August 2013 |
[2013] EWHC 2425 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Leggatt
Case No: CO/6822/2012
and
Andrew George (instructed by Stephenson Harwood) for the Claimant
James Strachan QC (instructed by FOS) for the Defendant
Hearing date: 3 July 2013
The contents of this judgment are as follows:
Introduction
| Section | Para. No. |
| Introduction | 2 |
| The Claim | 3 |
| The Regulatory Framework | 8 |
| The Dispute | 12 |
| Interpretation of Article 85 | 15 |
| The Contract Terms | 22 |
| Trading on the Account | 24 |
| The Different Contractual Relationships | 37 |
| Contracts with Third Parties | 38 |
| Contracts Between London Capital and the Client | 43 |
| Analysis of the Contractual Arrangements | 46 |
| Delivery | 58 |
| Alleged Factual Error | 72 |
| Conclusion | 74 |
The issue in this case is whether the Financial Ombudsman Service (the "FOS") has jurisdiction to deal with a complaint about the management of a foreign exchange trading account. The issue turns on whether the operation of the account involved dealing in contracts for differences or investments of a similar kind which are regulated under the Financial Services and Markets Act 2000 (" FSMA").
The Claim
The claimant, London Capital Group Ltd ("London Capital"), is a company which provides financial services including financial spread betting and foreign exchange trading accounts. The claim in this case relates to a foreign exchange ("forex") trading account with London Capital opened by a client, Mr Shrubb, on 22 June 2009 (the "Account").
On 16 May 2011 Mr Shrubb made a complaint to the FOS alleging that London Capital has mismanaged the Account. London Capital objected that the FOS has no jurisdiction to consider the complaint. This question was initially considered by an adjudicator who expressed the view that the FOS does have jurisdiction. London Capital did not accept this view and the question was referred to an ombudsman. On 4 April 2012 the ombudsman decided that Mr Shrubb was trading regulated contracts for difference and that the FOS could therefore consider his complaint.
On 29 June 2012 London Capital commenced this action claiming judicial review of the ombudsman's decision. Permission to proceed was refused on the documents by Haddon-Cave J on 22 October 2012 but was granted on 31 January 2013 by Foskett J following an oral hearing.
The Financial Services Authority (now the Financial Conduct Authority) made a written submission supporting the decision of the FOS on jurisdiction and has been joined to the proceedings as an interested party, along with Mr Shrubb. However, neither of the interested parties has taken part in the hearing.
The case has been argued with admirable clarity and economy on both sides, by Mr Andrew George for London Capital and Mr James Strachan QC for the FOS.
The Regulatory Framework
Pursuant to s.226 of FSMA, the FOS has "compulsory jurisdiction" over a complaint which relates to an act or omission of a person in carrying on an activity which is regulated under s.22 of FSMA. An activity is regulated under s.22 if it is an activity of a specified kind which is carried on by way of business and relates to an investment of a specified kind.
The kinds of activity and investment specified for this purpose are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the "RAO"). The specified activities include dealing in investments as principal (article 14) or as agent (article 21). Thus, article 14(1) of the RAO provides:
"Buying, selling, subscribing for or underwriting securities or contractually based investments … as principal is a specified kind of activity."
Article 21(1) provides:
"Buying, selling, subscribing for or underwriting securities or relevant investments … as agent is a specified kind of activity."
As defined in article 3, "buying" means "acquiring for valuable consideration" and "selling", in relation to any investment, includes "disposing of the investment for valuable consideration." For these purposes, "disposing" includes:
"(a) in the case of an investment consisting of rights under a contract –
(i) surrendering, assigning or converting the rights; or
(ii) assuming the corresponding liabilities under the contract."
The definitions of "contractually based investments" and "relevant investments" both include any investment of the kind specified by article 85.
Specified investments include "contracts for differences etc" as defined in article 85 of the RAO. Article 85 provides:
"(1) Subject to paragraph (2), rights under –
(a) a contract for differences; or
(b) any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in –
(i) the value or price of property of any description; or
(ii) an index or other factor designated for that purpose in the contract.
(2) There are excluded from paragraph (1) –
(a) rights under a contract if the parties intend that the profit is to be secured or the loss is to be avoided by one or more of the parties taking delivery of any property to which the contract relates; …"
The Dispute
It is not in dispute that, in operating the Account, London Capital was carrying on by way of business an activity of a specified kind, namely, dealing in investments. The dispute is about whether London Capital was dealing in any investments of the kind specified in article 85 of the RAO. If so, the activity of London Capital is regulated under s.22 of FSMA, with the result that the FOS has jurisdiction over Mr Shrubb's complaint. If on the other hand the operation of the Account did not involve dealing in any investments of the kind specified in article 85, the activity of London Capital is unregulated and the FOS does not have jurisdiction.
The position of the FOS and the basis on which it accepted jurisdiction over Mr Shrubb's complaint is that the trading on the Account involved Mr Shrubb acquiring rights under contracts with London Capital which had as their purpose the securing of a profit or avoidance of a loss by reference to fluctuations in the value of different currencies, and that it was not intended that such profits would be secured or losses avoided by taking delivery of the currency amounts traded. The rights under the contracts therefore fell within article 85(1) and were not excluded by article 85(2)(a). Hence London Capital was dealing in investments of a specified kind.
London Capital disputes that analysis. Its case in short is that the only contracts which could be said to fall within article 85(1) were spot foreign exchange contracts made by London Capital as agent for Mr Shrubb with market counterparties. These contracts were intended to be (and were) settled by delivery of the currency amounts traded and therefore fell within article 85(2)(a). Accordingly, they were unregulated. London Capital denies that Mr Shrubb's rights under the contracts between himself and London Capital were themselves investments or that those contracts had the purpose specified in article 85(1)(b). Alternatively, London Capital argues that in any event delivery was intended to be (and was) made by London Capital to Mr Shrubb of the currency amounts to which those contracts related so that the exclusion in article 85(2)(a) applied. Hence London Capital was not dealing in investments of a specified kind.
Interpretation of Article 85
Before considering the arguments in more detail, I will make some preliminary points about the meaning and effect of article 85 of the RAO.
The first concerns the term "contract for differences", which is not defined in the RAO. It appears from cases such as City Index Ltd v Leslie [1992] QB 98 that a contract for differences is a contract intended to be fulfilled by the payment of differences in price between notional sales and purchases of property rather than by delivery of the property. It is unnecessary, however, to determine precisely what the term means in sub-paragraph (a) of article 85(1), since the words "any other contract" at the start of sub-paragraph (b) make it clear that sub-paragraph (a) is subsumed by sub-paragraph (b). Thus, a contract cannot be a "contract for differences" unless it falls within article 85(1)(b); and if a contract falls within that provision, it does not matter for regulatory purposes whether or not it is a "contract for differences". Both parties have accordingly focused their submissions on the wording of article 85(1)(b).
To decide whether a contract falls within article 85(1)(b), it is necessary to ascertain its purpose. (I leave aside the words "or pretended purpose" since there is no suggestion in this case that any contractual arrangements were a pretence.) The language used in article 85(1)(b) refers to " the purpose" of the contract (my emphasis). A contract might have more than one purpose. However, it seems to me that, in principle, provided the dominant purpose is to secure a profit or avoid a loss by reference to fluctuations of the kind described, it cannot matter that the contract also has some other subsidiary purpose. The legislative history of article 85 confirms that the phrase "secure a profit" in this context means "make" or "obtain" a profit: see City Index Ltd v Leslie [1992] QB 98, 108, 111, 114.
The parties to the contract may not share the same purpose (or dominant purpose). Thus the purpose of one party to a contract involving foreign exchange might be to make a profit by speculating on the...
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