England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/08/2013

Mr Justice Leggatt :

1. The contents of this judgment are as follows:

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

Introduction

2. 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

3. 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").
4. 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.
5. 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.
6. 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.
7. 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

8. 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.
9. 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."

10. 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.

11. 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

12. 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.
13. 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.
14. 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

15. Before considering the arguments in more detail, I will make some preliminary points about the meaning and effect of article 85 of the RAO.
16. 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).
17. 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.
18. 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 movement of currencies while the other party might be entering into the transaction for the purpose of obtaining funds to meet a commercial obligation, or to hedge a particular risk, or to make a profit by charging a fee or commission. In applying article 85, it seems to me that the focus must be on the purpose of the customer with whom the person carrying on the specified activity is dealing and that it cannot matter whether the person carrying on the activity (or anyone else involved in the transaction) shares that purpose. I understood this to be accepted in argument by both parties.
19. To decide whether rights under a contract which has the purpose referred to in article 85(1)(b) are nevertheless excluded from paragraph (1) of article 85 because the contract falls within article 85(2)(a), it is necessary to ascertain whether the parties have the intention referred to in the latter provision.
20. In accordance with general principle, the purpose of the contract and the intention of the parties must be ascertained objectively by construing the terms of the contract in its factual setting. It is not relevant to ask what Mr Shrubb or London Capital subjectively intended. The task for the court is to ascertain what purpose and intention reasonable people in the situation of the parties to the contract may fairly be taken to have had.
21. The last preliminary point concerns what is meant by "delivery of property" in article 85(2)(a) in circumstances where, as in this case, the property to which the contract relates consists of a sum of money rather than a physical commodity. The transfer of money in commercial transactions usually takes the form of debiting one account with a bank or other financial institution and crediting another such account. The relationship involved between the parties to such an account is generally that of debtor and creditor rather than one of trustee and beneficiary. Thus strictly the delivery of property which takes place when money is transferred, say, from one bank account to another bank account is the discharge of one debt and the creation of a new debt in the same amount (less any transaction fee). I will return to this point later when considering London Capital's contention that the accounting arrangements between itself and Mr Shrubb satisfied the requirements of article 85(2)(a).

The Contract Terms

22. It is common ground that the contract made between Mr Shrubb and London Capital when the Account was opened incorporated the Terms and Conditions of Business of London Capital relating to spot foreign exchange transactions ("the Terms") and that the Terms governed all the subsequent dealings between Mr Shrubb and London Capital. The Terms are therefore the key contractual document from which the relevant purpose and intention of the parties must be ascertained.
23. The Terms which are most relevant for present purposes are the following:

"2. SERVICES

2.1 We offer execution-only dealing services to you in relation to transactions in spot foreign exchange contracts and such additional services as we may agree from time to time in writing. ...

2.2 We, London Capital Group Limited, will execute transactions on your behalf as agent. We will enter into a transaction with you, where you are the Principal and not acting as an Agent on behalf of someone else, unless we have otherwise agreed in writing. We shall be responsible to you alone and shall have no duties or obligations to your underlying principals or customers (if any) and you alone will be responsible for the performance of your obligations to us.

...

3. PRICES AND OPEN POSITIONS

3.1 We will provide you with "bid" and "offer" prices in respect of currencies through our On-Line Facility or our dealing desk (in case of emergency). Our fees and charges are set out in our account opening letter. … Each price shall be available for use in a dealing instruction for a transaction with a principal amount not to exceed a maximum determined by us published on our On-line Facility or otherwise notified to you. ...

3.2 Our service is restricted to executing transactions in foreign exchange at our quoted prices displayed on our On-Line Facility or otherwise published to you at your request.

3.3 If applicable, we may combine your orders with orders for our own account or the account of other clients. We will only aggregate your orders with other orders where we believe that doing so is in your best interests. However, on some occasions, this aggregation may result in you obtaining a less favourable price.

3.4 We may, in our absolute discretion, require you to limit the number of open positions which you may have with us at any time and/or only allow you to enter into closing transactions or we may close out any one or more positions or reverse transactions in order to ensure that the position limits we have imposed are maintained.

3.5 If you enter into any currency transaction any profit or loss arising as a result of a fluctuation in the exchange rate affecting such currency will be entirely for your account and risk.

…

8. MARGIN AND COLLATERAL

8.1 You shall provide to us and maintain with us margin in respect of and as security for your actual, future and contingent liabilities to us in such amounts and in such forms as we, in our absolute discretion, may require. We may change our margin requirements at any time.

8.2 Any requirement for margin payments must be satisfied within such time as may be specified by us or, if none is specified, immediately. One margin call does not preclude another. Margin may be provided in the form of cash or if we otherwise agree, other assets as collateral (by which we mean investments or any other property or assets acceptable to us in lieu of cash) ...

…

10. SETTLEMENT DATE, ROLLOVER AND OFFSET INSTRUCTIONS

10.1 We will automatically rollover all open spot positions on your account to the following Business Day unless you instruct us to close your position(s) prior to 9pm (London Time). We will charge you a fee in respect of each such position that is rolled over. The fees that we charge will be published on the On-line Facility.

10.2 In the absence of clear and timely instructions from you, we are authorised, at our absolute discretion, to rollover or offset all or any portion of the currency positions in your account(s) or to make or receive delivery on your behalf upon such terms and by such methods deemed reasonable by us.

10.3 For the avoidance of doubt, we will not arrange delivery of currencies unless we deem necessary or if we otherwise agree in writing with you and, accordingly, unless such arrangements have been made by us any currency positions that settle shall do so by credit or debit to your account with us.

11. CLIENT MONEY AND ASSETS

11.1 You agree and acknowledge that full title to and ownership of your funds has been transferred by you to us for the purpose of securing or otherwise covering your present or future, actual or contingent or prospective obligations, and that such funds do not constitute and shall not at any time be deemed to constitute client money for purposes of the FSA's Client Money Rules. You no longer have a proprietary claim over your funds transferred to us, and we can deal with them in our own right. Your funds will not usually be segregated from our money and may be used by us in the course of our business.

…

17.9 Additional rights

… we are authorised and entitled, without notification to you, and in our absolute discretion to take such action as we deem necessary, expedient or desirable, to protect our own position, including without limitation, one or more of the following actions (whether in whole or in part):

17.9.1 close out or give instructions to close out all or any of your open positions;

17.9.2 perform, cancel or if applicable abandon any of your open positions;

17.9.3 borrow, buy, sell, mortgage, charge or otherwise dispose of any or all Assets which you may have requested us to enter into or hold with or for you or other property of any type held or carried for you …

Any of the above actions may be taken without demand for margin or additional margin, and regardless of whether the relevant investments or transactions which we may have executed or arranged with, or for you, are solely yours or held jointly with others. …"

Trading on the Account

24. Evidence has been adduced by London Capital which explains how the Account was operated in practice. This evidence is helpful in so far as it illustrates the practical application of the Terms. In so far, however, as it was suggested that what was actually done did not always comply with the Terms, I do not regard this as relevant to the issues I have to decide. As already indicated, the purpose and intention of the parties to the relevant contract must be determined from what they agreed. If what was done did not accord with what was agreed, that cannot affect the question of whether or not rights under the contract are a regulated investment.
25. The way in which trading was intended to take place in accordance with the Terms was, in outline, as follows.
26. When opening an account, the client was required to transfer funds to London Capital to provide margin or security for any liabilities incurred to London Capital (see clauses 8.1 and 11.1). The amount transferred by Mr Shrubb when opening the Account was £25,000.
27. Trading involved opening and closing currency "positions". To open a position the client gave an instruction to London Capital to sell an amount of one currency and buy an amount of another currency at an exchange rate quoted by London Capital. To take a hypothetical example, the client might instruct London Capital to purchase £20,000 by selling US dollars at a quoted rate of 1.60. To execute this instruction, London Capital would enter into a spot contract with a bank counterparty via a trading platform known as the Currenex platform.
28. The client was not required to provide the funds to settle the trade; these were provided by London Capital. On the settlement date (which was usually one or two days later) London Capital would in the example given pay US$32,000 to the counterparty and receive £20,000 in exchange. These amounts would respectively be debited and credited to the client's account with London Capital.
29. Before the end of the trading day in which a position had been opened, the client could instruct London Capital to close the position. To close the position London Capital would enter into a spot foreign exchange contract with a counterparty to reverse the effect of the previous trade. In my example this would involve selling £20,000 in exchange for US dollars. Suppose that in the meantime sterling had strengthened against the dollar and that the quoted exchange rate was now 1.61; in that case the amount purchased would be US$32,200. On settlement of the second transaction London Capital would thus pay £20,000 to the counterparty in exchange for US$32,200 and would again debit and credit these sums respectively to the client's account.
30. The net result of the two trades in my example would be that the client made a profit of US$200.
31. If the client did not instruct London Capital to close a position before 9pm on the day when the position had been opened, clause 10.1 of the Terms provided for the automatic rollover of the position to the following business day. As explained by London Capital's solicitors, Allen and Overy, in a letter to the FOS dated 20 September 2011, at paragraphs 34-35:

"The so-called "rollover" facility in fact did not involve one contract but a series of separate and distinct contracts. In practice it operated as follows. If a contract was concluded on day one for the sale of currency X and the purchase of currency Y (the First Contract) but no equal and opposite contract had been concluded for the sale of Y by 10pm on the same day, the Currenex platform would conclude a separate contract (the Second Contract) in an opposite direction to the first Contract on the basis of the market price of the currency in question at 10pm, such that Mr Shrubb would have a net zero position in currency Y.

A few minutes later, the Currenex platform would conclude a further contract (the Third Contract) in the same direction as the First Contract, on the basis of the prevailing market price of the currency in question at a few minutes after 10pm (whatever that price might be)."

32. The Terms thus required every position opened by the client on any business day to be closed before the end of that day. If the client did not instruct London Capital to close the position, the position would be closed automatically and a new position opened in accordance with the "rollover" provision.
33. In so far as it was asserted, therefore, in a witness statement dated 23 April 2013 made by Siobhan Moynihan on behalf of London Capital in these proceedings (at paragraphs 20 and 21) that "the rollover facility was never used by Mr Shrubb" and that "Mr Shrubb did not routinely close out his positions by entering into a matching equal and opposite transaction", I disregard this evidence as inconsistent with the Terms and consequently irrelevant for the reason already given.
34. The way in which the account operated allowed trading to take place on a highly geared basis. As mentioned, the client did not have to provide the funds required to settle any trade. The only payment obligation was to provide margin which was sufficient to cover any net liability on the account at any given time including any contingent liabilities which would accrue on closing any open positions. Provided that the client maintained sufficient margin, trading could continue. If more margin was required to cover the clients liabilities, London Capital could make a margin call under clause 8. London Capital also reserved the right to refuse to allow the client to open a new position or to close out any existing position under clause 3.4 and/or clause 17.9.
35. Although not expressly provided for in the Terms, a client was allowed to withdraw money without closing the account. While not spelt out in the evidence adduced by London Capital, however, it is clear from the Terms (in particular, clause 8.1) that a client would not be allowed to withdraw any amount which was required to secure any liabilities (actual or contingent) to London Capital. A withdrawal could therefore be made only if and to the extent that there was a positive net balance on the Account after taking account of all such liabilities and all sums owed to the client converted into the currency of the amount to be withdrawn.
36. Mr Shrubb's account was closed by London Capital (apparently not at his request) in December 2009. According to his complaint to the FOS, the closing balance on his account was £14,584, representing a loss of £10,416 on his original deposit. He is seeking to hold London Capital responsible for this loss.

The Different Contractual Relationships

37. For the purpose of legal analysis, it is important to distinguish between (a) the spot forex contracts made with bank counterparties when positions were opened or closed and (b) the contractual arrangements between London Capital and its client. As I have mentioned and will now explain in more detail, it is common ground that rights under the former did not fall within article 85 and were unregulated investments. The two points of contention are: (1) whether rights under the contracts between London Capital and Mr Shrubb fell with the scope of article 85(1) at all; and (2) if they did, whether they were nevertheless excluded by article 85(2)(a).

Contracts with Third Parties

38. London Capital accepts that the rights under the spot forex contracts made with bank counterparties via the Currenex platform when a position was opened or closed were investments which London Capital was buying and selling when it executed such contracts. It is for this reason that London Capital accepts that it was carrying on a specified kind of activity.
39. London Capital maintains that, in executing the spot forex contracts, it was acting as agent for Mr Shrubb. The Terms expressly authorised London Capital to execute transactions on the client's behalf as agent and recorded an intention to do so in clause 2.2. There is, however, no evidence about the terms on which London Capital contracted with the banks. It seems to me unlikely that London Capital would have disclosed to its counterparty the fact that it was acting as an agent rather than for its own account in any particular transaction, and also unlikely that the parties to the spot forex contracts would have agreed to assume obligations to anyone other than their counterparty (such as an undisclosed principal). I am therefore doubtful – and certainly there is no evidence to show – that Mr Shrubb acquired any rights or obligations under the contracts made with the banks. The correct analysis may therefore be that, despite the agency agreement with its client, London Capital was buying and selling investments as principal so that article 14 applied when it entered into spot forex contracts with the bank counterparties. However, it is unnecessary to decide that question as nothing turns in this case on whether the activity in which London Capital engaged when it executed such contracts fell within article 14 (dealing in investments as principal) or article 21 (dealing in investments as agent).
40. On behalf of London Capital, Mr George was willing to accept that the purpose of the spot contracts made with the banks was to secure a profit or avoid a loss by reference to fluctuations in the value of the relevant currencies. If the contracts were executed by London Capital as agent for Mr Shrubb so that his purpose was relevant, it is clear that this concession was rightly made. As I will discuss later, the way in which the Account operated was such that it was only capable of being used by the client for the purpose of speculating on currency movements. On that basis Mr George accepted that the rights under the spot contracts with the banks fell within article 85(1)(b).
41. It was not, however, disputed by Mr Strachan QC on behalf of the FOS that, when the spot contracts settled, the currency amounts bought and sold were actually delivered and that it was by taking delivery of those amounts that the parties to the contracts intended that a profit was to be secured (or loss avoided). Hence the exclusion provided for in article 85(2)(a) applies.
42. Accordingly, it is common ground that the rights under the spot forex contracts made with the banks do not fall within article 85 and are not specified investments.

Contracts between London Capital and the Client

43. The contracts made between London Capital and Mr Shrubb consisted of (a) the 'master' contract made when the Account was opened which governed the operation of the Account and (b) the particular contracts made whenever London Capital accepted an instruction to execute a spot foreign exchange trade. London Capital's primary case, as argued on its behalf by Mr George, is that the rights under these contracts were not themselves investments and are therefore not capable of falling within article 85 at all.
44. The basis for that contention is that, pursuant to the Terms, the services which London Capital agreed to provide were limited to execution-only dealing services. Thus, clause 2.1 states:

"We offer execution-only dealing services to you in relation to transactions in spot foreign exchange contracts ..."

Although clause 2.1 goes on to mention the possibility of agreeing additional services, it is not suggested that any agreement to provide additional services was made in this case. Reliance is also placed on clause 2.2 which provides that London Capital "will execute transactions on your behalf as agent."

45. Mr George argued that article 85 must be applied in a way which respects the distinction between acting as a principal and as an agent, and that the effect of clause 2 of the Terms is that London Capital was acting solely as an agent. Thus, it cannot be said that the purpose of any contract between London Capital and Mr Shrubb was itself to secure a profit or avoid a loss by reference to fluctuations in the value of currencies. Rather, the purpose of the contract made when the Account was opened was simply to set out the terms on which London Capital would arrange the purchase and sale of investments (consisting of spot forex contracts) on behalf of the client, if instructed to do so. Similarly, the purpose of the contracts made when instructions to open or close positions were accepted was only to arrange for particular investments to be bought and sold on behalf of the client. In consequence, Mr George submitted, the rights under the contracts between London Capital and Mr Shrubb were not themselves investments and did not fall within the scope of article 85.

Analysis of the Contractual Arrangements

46. I accept the point made by Mr George that the distinction between acting solely as the client's agent and dealing with the client as a principal is important and that article 85 must be interpreted and applied in a way which respects this distinction. I also accept that a firm providing a simple execution-only dealing service could not be said to be dealing in investments as a principal with its client, but only to be buying and selling investments on its client's behalf. I therefore accept that rights under the contracts made between such a firm and its client when an account is opened and when instructions are accepted by the firm to buy and sell investments are not capable of falling within article 85 even if the client's purpose in buying and selling the investments is to secure a profit or avoid a loss by reference to fluctuations of the kind described in article 85(1)(b).
47. I do not accept, however, that on the proper interpretation of the Terms London Capital was doing no more than providing such an execution-only dealing service to its client. To understand the nature of the contractual relationship established by the Terms, it is necessary to consider the Terms as a whole and not just to look at clause 2. When all the relevant Terms are considered, I think it clear that the contractual relationship between London Capital and the client differs from a simple execution-only dealing service in three important respects.
48. The ordinary meaning of an "execution-only" dealing service is one in which the service provider (whom I will for convenience call the "broker") simply buys and sells investments according to the client's instructions without offering any advice or having any control over the investment decisions. Under an ordinary or typical arrangement of this kind: (1) the client is free to decide what investments of the relevant kind (e.g. spot forex transactions) to instruct the broker to buy or sell on the client's behalf; (2) the client must provide the funds to pay for any investment which the client instructs the broker to buy; and (3) the client can require delivery of any investment bought (or the proceeds of any investment sold) by the broker on the client's behalf.
49. The contractual relationship between London Capital and Mr Shrubb as established by the Terms has none of these three characteristics.
50. As to the first, it is true that Mr Shrubbb was free to choose whether and when to open a position and, in opening a position, what amount of which currency (subject to any relevant trading limits) to sell in exchange for which other currency. However, once a position had been opened, it had to be closed by the execution of a spot contract to sell the currency amount which had been purchased and buy back the currency originally sold (at the exchange rate now quoted). The only freedom of choice which the client had was with regard to timing. Even this freedom was limited since (1) if no instruction was given to close a position before 9pm on any business day, the position would automatically be closed pursuant to the automatic rollover provision in clause 10.1 of the Terms, and (2) London Capital retained an absolute discretion to close any position at any time if it considered this desirable in order to protect its own interests.
51. Second, the client was not required to pay the amount needed to settle any spot forex transaction. The funds were provided by London Capital. The only funds which the client was required to provide were payments of margin sufficient to cover the net exposure on the Account at any given time. This arrangement was possible because of the first feature mentioned whereby every position opened had subsequently to be closed. This meant that the exposure of London Capital was limited to the difference between the price at which a currency amount had been purchased and the price at which it was (or could on closing the position be) sold.
52. Third, the client could not obtain delivery of the proceeds of any spot forex transaction by requiring the amount received on settlement to be transferred to the client's account with another institution. This is made clear "for the avoidance of doubt" in clause 10.3 of the Terms. But this feature was in any event inherent in and essential to the way in which the account worked. The quid pro quo for the client not providing the funds required to settle a trade was that the client was not entitled to take delivery from London Capital of the sum which London Capital received in exchange for the payment of those funds, since the credit to the client's account of the funds received would be offset by the corresponding liability for the sum paid. Furthermore, the first of the features mentioned, whereby every position opened had to be closed before the end of the same day, meant that, as soon as a position was opened and therefore before the amount of currency purchased in that transaction had been received by London Capital, the client assumed a contingent liability to sell that same amount of currency in order to close the position. It is only if and to the extent that the combined effect of the two transactions was to generate a net profit that there would be any sum received on settlement of either transaction which the client would be entitled to withdraw.
53. In my view, these features of the contractual arrangements between London Capital and Mr Shrubb, in combination, had the effect that, when the Account was opened, London Capital was not simply agreeing to provide an execution-only dealing service of buying and selling investments as agent for Mr Shrubb. The opening of the Account and the opening and closing of currency positions involved the acquisition of rights and assumption of liabilities to make payments which were different in nature and amount from the payments due on settlement of the spot forex trades. In return for the payment of funds to London Capital to provide margin, Mr Shrubb acquired a set of contractual rights which did not, however, include a right to be paid any sum received by London Capital under any forex trade. As I have indicated, the only sum which Mr Shrubb was ever entitled to be paid arising from any spot forex transaction was any net profit made when a position which he had opened was subsequently closed.
54. In these circumstances I consider that the rights under contracts between London Capital and its customer are properly regarded as investments which were distinct, and different in kind, from the spot forex contracts. By the same token, the contracts between London Capital and its client had their own investment purpose, and not merely the agency purpose contended for by Mr George.
55. Once the execution-only argument is rejected, the conclusion is irresistible – and I did not understand it otherwise to be resisted – that the purpose of the contracts between Mr Shrubb with London Capital was to secure a profit or avoid a loss by reference to fluctuations in the value of currencies. The Terms – and in particular the three characteristics which I have emphasised – were such that the Account could not have been used for any other purpose. A client who, for example, needed to settle a commercial debt denominated in a foreign currency could not have used the Account to obtain funds for this purpose since every position opened had subsequently to be closed out, and the client was not entitled to take delivery of any sum purchased under any spot contract but only of any net profit resulting from a matching pair of trades.
56. It follows that I do not think it realistic to characterise the Account, as London Capital has sought to do, as merely a vehicle for foreign exchange trading carried out on the client's behalf with third parties. If anything, the reality was the other way round. The spot forex transactions executed by London Capital with bank counterparties were merely the vehicle used to generate the profit or loss from speculation on currency movements which represented the purpose of Mr Shrubbb's investment with London Capital.
57. I conclude that, subject to the question whether the exclusion in article 85(2)(a) applies, rights under the contracts made between London Capital and Mr Shrubb were investments of the kind specified in article 85(1).

Delivery

58. The second and alternative argument advanced by London Capital is that, even if the contracts between Mr Shrubb and London Capital had the purpose specified in article 85(1)(b), as I have found that they did, the rights under the contracts fall under article 85(2)(a). It may be recalled that this provision excludes from paragraph (1) of article 85:

"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;"

London Capital has argued that the currency amounts traded were delivered to (and by) Mr Shrubb, and that it was by means of such delivery that profits were intended to be secured and losses avoided.

59. The first basis on which this argument is advanced is that Mr Shrubb took delivery of the currency amounts which determined his profit or loss because London Capital received payment of these amounts as Mr Shrubb's agent. As mentioned earlier, it is not disputed that delivery was made under the spot forex contracts with bank counterparties. Whether currency amounts received by London Capital under those contracts should be regarded as delivered to Mr Shrubb on the ground that London Capital was acting as his agent in my view does not matter for present purposes. That is because the relevant contracts for present purposes are not the spot forex contracts with bank counterparties – which it is agreed were unregulated – but the contracts between London Capital and Mr Shrubb.
60. Nor do I accept, in so far as it was suggested, that article 85(2)(a) is engaged by one or more of the contracting parties (be it Mr Shrubb or London Capital or both) taking delivery of property from a third party. It is plain from clause 10.3 of the Terms that the way in which London Capital and Mr Shrubb intended that the profit which Mr Shrubb was aiming to achieve was to be secured or the loss avoided was by crediting or debiting to the Account sums received or paid by London Capital on the settlement of trades. The relevant question is therefore whether such crediting or debiting amounted to delivery by London Capital to Mr Shrubb or by him to London Capital of property to which the contracts between them related.
61. That question might be thought to have a very short answer since clause 10.3 says expressly that (in the absence of some special arrangement) delivery of currencies will not be made. Clause 10.3 states:

"For the avoidance of doubt, we will not arrange delivery of currencies ... and, accordingly, ... any currency positions that settle shall do so by credit or debit to your account with us."

It follows that, judged objectively from what they agreed, the parties did not intend that the profit was to be secured or loss avoided by Mr Shrubb or London Capital taking delivery from the other of the currency amounts credited or debited to the Account which determined such profit or loss.

62. Mr George valiantly sought to escape this conclusion by contending that the word "delivery" is used in a different sense in article 85(2)(a) of the RAO from the sense in which the word "delivery" is used in clause 10.3 of the Terms. He argued that, for the purposes of article 85(2)(a), "delivery" of currencies was made by crediting and debiting Mr Shrubb's account with London Capital. Thus, he submitted that clause 10.3, despite stating that London Capital would not arrange "delivery", in fact established a contractual mechanism which did just that within the meaning of the term "delivery" in article 85(2)(a).
63. In support of this argument, Mr George relied on a statement of Thomas J (as he then was) in Larussa-Chigi v CS First Boston Ltd [1998] CLC 277 at 286, as follows:

"It is common place in commercial transactions that in the settlement of foreign currency transactions there is physical delivery, not in the sense of cash being physically transferred, but by a transfer by electronic or other means or a real debiting or crediting between bank accounts."

64. I do not regard this argument as tenable, for three reasons.
65. First, I do not accept that the term "delivery" in article 85(2)(a) is reasonably capable of bearing the meaning for which Mr George contended. Crediting a sum of money to a client's account does not constitute delivery of any property by the institution to the client. It is merely an acknowledgement by the institution with whom the account is held of a debt owed to the client. Delivery of property would come about only if cash was physically transferred to the client or if the money was transferred on the client's instructions to another account. In the latter case, as I indicated earlier in this judgment (at paragraph 21 above), delivery is effected by discharging the indebtedness of the institution to the client and replacing it by a new debt in a corresponding amount. Thus, in my view, the term "delivery" has only one relevant meaning in this context and means the same in article 85(2)(a) of the RAO as it plainly does in clause 10.3 of the Terms.
66. Second, even if it were a possible meaning of the word, it would make no sense and would defeat the clear purpose of article 85 to interpret the requirement of "delivery" in article 85(2)(a) as satisfied by making a credit or debit to a client's account in circumstances where the client is not entitled to withdraw any amount credited nor required to pay the amount of any debit. The clear purpose of article 85(2)(a) is to exclude from the scope of regulation transactions where the property to which the contract relates is actually transferred, as opposed to there being a netting off of obligations in each direction with a right to receive, and duty to make, a transfer only of the difference. The present case falls squarely in the latter category. Put another way, there is no material or practical difference between the arrangement in the present case where all the currency amounts bought and sold under the spot contracts with the banks were credited and debited to the client's account and an arrangement in which only the net profit or loss on each pair of matching trades is credited or debited. In each case the client's ability to withdraw money from, and liability to pay money into, the account is exactly the same. It would therefore be irrational if article 85(2)(a) applied to the first of these arrangements when it is plainly not intended to apply to the second.
67. The third reason for rejecting the interpretation of article 85(2)(a) contended for by Mr George is that the passage cited from the judgment of Thomas J in the Larussa-Chigi case, far from supporting his argument, is in my opinion authority directly against it. When Thomas J referred to delivery taking place by means of "a real debiting or crediting between bank accounts", I think it plain that he was referring not to the mere debiting or crediting of sums of money by a bank to its customer's account but to the transfer of money between bank accounts by novation of the debt which takes place when a sum is debited to one bank account and credited to another bank account. If there was any doubt about this, it is removed by the words which immediately follow the passage quoted. Thomas J continued:

"In these transactions, however, no one contemplated Mrs Chigi transferring to First Boston US$70m and First Boston transferring to Mrs Chigi DM120m whether by electronic transfer or otherwise or there being a debiting and crediting of these sums between different bank accounts. All that was ever contemplated or intended was settlement of differences."

68. Those words are equally applicable in the present case. When a spot forex transaction settled – for example, a purchase of £20,000 in exchange for US$32,000 – no one contemplated Mr Shrubb transferring US$32,000 to London Capital and London Capital transferring £20,000 to Mr Shrubb, for example by debiting and crediting these sums between Mr Shrubb's account with London Capital and his account with another financial institution. All that was ever contemplated or intended was that Mr Shrubb should transfer sufficient funds to London Capital to provide margin to cover any net loss and should be entitled to have transferred to him any net profit made on closing a position which had previously been opened. In effect, therefore, all that was ever contemplated was settlement of differences.
69. Mr George also argued that the operation of the Account was no different from the situation where a customer has two accounts with a bank, one in credit and the other overdrawn. The bank may offset the two amounts and only allow the customer to withdraw any positive net balance; however, that does not mean that the parties did not ever intend that there should be delivery of the sum owed to the customer on the account in credit.
70. I do not accept this analogy. When money is credited to a bank account, it is intended that the customer should be able to withdraw or transfer the money, unless the customer happens at the time to have other debts to the bank which the bank is entitled to set off against the amount credited. By contrast, even if one assumes no other debts, it was never intended that Mr Shrubb should be able to withdraw or transfer from the Account the currency amount credited to the Account on the settlement of a trade.
71. For these reasons I reject the argument that there was intended to be delivery of currency amounts under the contracts between London Capital and Mr Shrubb such as would bring rights under those contracts within article 85(2)(a).

Alleged Factual Error

72. Finally, Mr George argued that the ombudsman's jurisdiction decision was based on a factual error in so far as the ombudsman's description of the process of accounting concluded that "[t]he proceeds of the two trades would be netted off and [London Capital] would debit or credit Mr Shrubb's account with the profit or loss arising from the trade." Mr George referred to evidence adduced by London Capital which indicates that all the currency amounts bought and sold were credited and debited to the Account and not merely the differences resulting after positions which had been opened were later closed by opposite matching transactions. Mr George submitted that, if the ombudsman had not made this factual error, the FOS would (or should) have found that the wording of article 85(2)(a) was satisfied.
73. I accept on the evidence that Mr Shrubb's account was credited and debited with all currency amounts bought and sold and not just with the profit or loss arising after the proceeds of each pair of trades had been netted off. However, for the reasons given earlier, I do not consider that this makes any difference to the practical effect of the arrangements nor to whether the requirement of "delivery" in article 85(2)(a) was satisfied. I therefore accept the submission that the ombudsman did make a factual error but find that the error was not material and does not affect the correctness of the ombudsman's decision.

Conclusion

74. I conclude that, on the proper interpretation of the Terms and of the RAO, when positions on his forex trading account were opened and closed, Mr Shrubb acquired rights under contracts with London Capital which fell within article 85(1) of the RAO and were not excluded by article 85(2)(a). Those rights were therefore a kind of investment specified for the purposes of s.22 of FSMA. It follows that the FOS has jurisdiction under s.226 of FSMA over Mr Shrubb's complaint about the management of his account.