Robert Day v Forex Capital Markets Ltd

This judgment was handed down by the Judge remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be 10:30 on Wednesday 7 th June 2023.

A. Introduction

The claimant lost £1,863,383.61 in a 70 day period between 10 February 2020 and 20 April 2020 as a result of spread bets he placed on an online platform operated by the Defendant (“FXCM”). By this action he seeks to recoup those losses and recover substantial damages. The bets (or contracts for difference – CFDs) concerned the price of oil, more particularly the price of the West Texas Intermediate (“WTI”) futures contract traded on the New York Mercantile Exchange (“NYME”).

The period over which the losses were suffered was dominated by the covid-19 epidemic. The slowdown in global travel, production and general commerce over that time meant that demand for oil fell and so prices slumped. The resultant market volatility made this both a fertile and dangerous time for speculators. Mr Day was prepared to risk close to £2 million on oil prices rising. Unfortunately for him the risk did not pay off and he was proved wrong.

Mr Levy, who appears for Mr Day with Mr Beor-Roberts, submits that Mr Day's losses were caused by FXCM's breach of contract and statutory duty in failing to comply with its terms of business and the Conduct of Business Sourcebook section of the Financial Conduct Authority Handbook. In particular, FXCM (i) did not do enough to carry out the required “appropriateness assessment” and wrongly assessed that its service was appropriate for him; (ii) failed to provide confirmation in a durable medium of the expiry dates of his USOIL contracts and to honour the advertised expiry date of 18 May 2020, and (iii) failed to give prior notice that its system could not handle trading in USOil and that it would close USOil contracts if the market price was zero or negative. If FXCM had honoured its advertised expiry date, Mr Day says he would have made a profit, not a loss. If FXCM had assessed that its service was not appropriate for him or had not given him misleading expiry date information, Mr Day says he would not have traded and suffered loss as he did.

B. The parties and the evidence

B.1 The Parties

Mr Day is 43 years old. He has no formal qualifications at all but is by any measure a financially successful businessman. He was made bankrupt in 2006 on his own petition and discharged from bankruptcy in normal course. In late January 2020, at the time he opened the trading account with FXCM he ran and controlled 3 substantial businesses: a courier business with an annual turnover of around £23.7 million and an annual gross profit of around £1 million and 2 garage businesses. He describes himself as an “ entirely self-made man who has achieved success without the benefit of any inheritance or formal education”. Even after the losses sustained in 2020, he remained in a solid financial position. When his brother expressed concerns about the size of the losses in a WhatsApp chat on 21 April 2020, Mr Day's response was: “….calm down, I still have £3m in the bank”. Before opening his FXCM account in 2020 he had previous trading experience and on any view was familiar with the complexities and mechanics of online trading.

FXCM advertises itself as a “ leading provider of online exchange (FX) trading, CFD trading, spread betting and related services”. It operates an online spread betting platform. It provides a range of some 500 complex financial products to retail and professional clients, including CFDs linked to both commodities (oil, gas and metals) and to treasury products. The FXCM product linked to WTI was known as “USOil”. FXCM is a limited company registered in England and Wales and is subject to regulation by the Financial Conduct Authority (“FCA”). In accordance with its FCA obligations it was required to assess if its products were appropriate for Mr Day.

B.2 The evidence

I heard evidence from the claimant and from his brother Kieron Day.

For FXCM I heard from Byron Spencer (Senior Vice-President of Marketing Web Technology), Craig Mischel (a product manager) and Juan Café (a director and Chief Operating Officer of FXCM).

I heard also from 2 experts. Mr Cox on behalf of the claimant and Mr Bird on behalf of the Defendant. The experts each prepared reports and there is a joint report. Mr Cox provided a follow-up report.

In addition I have had the benefit of contemporaneous discussions via WhatsApp between Mr Day and his brother.

Save for the experts (whose reports with exhibits covered some 540 pages), I found all of the evidence helpful. The experts were instructed to provide a view on 3 issues which can be summarised as follows: how would a regulated firm approach the issue of appropriateness? What information should a regulated firm have provided to Mr Day after his orders had been executed, and to what extent was it anticipated that there would be volatility in WTI Light Sweet Crude Oil Futures?

Broadly speaking, Mr Cox adopts a protective and interventionist approach whereas Mr Bird adopts a light touch approach. I formed the impression that Mr Cox (as is hinted at in the passage cited above) expected FXCM to do more than COBS required. He clearly regards COBS as setting out a minimum viable standard so that compliance with that standard would not in his view be good enough.

In my view, as far as the experts deal with relevant issues, Mr Bird's approach is to be preferred. Section 138D of FSMA makes it plain that a breach of the rules may be actionable. The case pleaded against FXCM relies on breaches of COBs and breaches of contract.

C. CFDs in general and USOil in particular

The precise mechanics of spread betting are explained by Rix LJ in Spreadex v Battu[2005] EWCA Civ 855 at paragraphs 2 and 3 and by His Honour Judge Pelling KC in Quinn v IG Index[2018] EWHC 2478 (Ch) at paragraphs 3 to 11. I gratefully adopt those explanations. This section of the judgment deals with some further general explanation of CFDs and some specific explanation of relevant features of USOil CFDs.

C.1 CFDs in general

By way of overview, and as explained in a Key Information Document (“KID”) produced for CFD customers by FXCM, a CFD:

“ ….allows you to obtain an indirect exposure to an underlying asset such as a security, commodity or index. This means you will never own the underlying asset; you will make gains or suffer losses as a result of price movements in the underlying asset to which you have the indirect exposure”.

Here the underlying asset is a commodity, namely the WTI futures contract. If the customer wants to bet on the price of the futures contract going up, they will elect to “buy” CFDs (“go long”). If the customer wants to bet on the price falling, they will elect to “sell” CFDs (“go short”). Gains and losses are fixed when a position is closed. At closure, the price of the CFD is compared to the price when the position was opened. If the price has moved in the direction predicted by the customer, then the customer will gain. If the price has moved the opposite way, there will be losses.

A CFD is a leveraged product. In their consultation paper of December 2016 the FCA describe trading with leverage in this way:

“ trading with leverage means that investors are only required to deposit a small percentage (margin) of the total value of the investment when opening a position…. the client's profits or losses are based on changes in value of the total investment. This means leverage magnifies a client's profit or loss on a position compared to the funds deposited as margin.”

C.2 Leverage, USOil margins and the how losses and gains are worked out

FXCM's KID explained margin and leverage in this way:

“CFD trading requires you to maintain a certain level of funds in your account to keep your positions open. This is called margin. You will be able to open a position by depositing only a small portion of the notional value of the position, creating a leveraged position. Leverage can significantly magnify your gains and losses.”

A customer would need to have £20 available in their trading account for each USOil CFD the customer wanted to open. That amount (the “entry margin”) was fixed, and not dependent on the advertised price of USOil. Once a position was opened the opening margin would cease to be treated as available equity.

As the price of USOil fluctuated, the customer stood to lose or gain (depending on whether the position opened was long or short and on whether the market rose or fell) $0.10 for every $0.01 in price change on each contract held (the “pip cost”). If the client did not maintain sufficient equity in his account to cover the entry margin, FXCM had a discretion to close positions. If the client did not maintain sufficient equity to cover the “liquidation margin” (set at 50% of the entry margin) FXCM was obliged to close down open positions.

The CFD Product Guide produced by FXCM (“the Product Guide”) explains the pip cost and provides a link to a pdf which sets out margin requirements.

C3. Expiry

With the exception of gold and silver CFDs, all commodity CFDs offered by FXCM (including USOil) had an expiry point. A customer trading in USOil would therefore need to...