DAVID MAYALL (instructed by Dentons UK and Middle East LLP) for theClaimant
ZOË BARTON KCand DANIEL LEWIS (instructed by Withers LLP) for the Defendant
Hearing dates: 4th, 5th, 6th and 7th June 2024
(Draft judgment circulated to the parties on 19th July 2024)
Judgment Approved
This judgment was handed down remotely at 10.00am on Wednesday 31st July 2024 by circulation to the parties or their representatives by e-mail and by release to The National Archives.
"Mr Mayall says that this is a very simple issue. The statute provides for a claim for breach of statutory duty and so I should grapple with the contrasting and conflicting submissions of the parties. In my judgment, it is not appropriate to do this on a summary judgment or strike-out application. This is not just a short point of law or construction. In my judgment, the defendant has a realistic prospect of showing that this is a novel point which should be resolved in his favour in light of the changes made in 2018. I accept the submission that the authorities relied upon by Mr Mayall, which predate this time, must be approached with caution."
"Mr Tchenguiz is an experienced spread better and, at the time relevant to these proceedings when it is claimed a debt to the claimant became repayable, he had positions with a number of [spread betting firms] in total equivalent to about 81m shares in First Group including the position taken with CMC which is the subject matter of these proceedings."
"1. Spread betting is not so much or not merely a bet, although it can be described as such, as a form of contract for differences. It enables a customer to take a position on a market (or an event) for a very small stake. Thus if the Dow Jones index is, say, at 10,000, one can "buy" or "sell" the market at a spread around the index of, for the sake of example, 10 points either way, 9990 to 10010. If one buys, one is betting that the market will rise above 10010. If one sells, one is betting that the market will fall below 9990. If one buys and the market rises, one stands to gain £1 for every point that the index exceeds 10010. If one sells and the market falls, one stands to gain £1 for every point that the index drops below 9990. If, however, one calls the market wrong, then one will stand to lose £1 for every point that the index exceeds the spread point in the wrong direction. Thus if one sells at 10,000 with a sell spread point at 9990, one will make £1 for every point the market falls below 9990 and lose £1 for every point the market rises above 9990. Until the bet or "trade" is closed, the gains and losses are merely "running" gains or losses. They are real enough, but constantly changing with every change in the index, and have not yet been fixed. Closing the bet will fix the position, win or lose. Unlike a classic bet, the customer can of course lose more than his stake. Indeed, on the example given, of a sale spread point of 9990 when the market is at 10,000, if the market does not move an inch, the customer will lose £10 for every £1 staked. Nor, again unlike a classic bet, are his winnings fixed at the outset by an agreement on odds. In theory winnings based on rising markets are infinite (in practice of course they are not) and losses based on falling markets are limited only in so far as they cannot exceed the consequences of a fall in the index to zero.
2. Normally, of course, to gain by £1 for every rise (or fall) of a single point in a stock market index such as the Dow Jones would take an investment of significantly more than £1. In effect, one's £1 bet commands a position in the market significantly greater than the stake. In other words, there is a large element of gearing in the trade, and the situation is correspondingly volatile. Where the market in question is itself in a volatile phase, the risks become even greater. Thus, if the Dow Jones is capable of moving within a range of 100 or 200 points in a single day, the customer can be £100 to £200 richer or poorer per £1 stake within a matter of hours of his trade. On a trade of £100, those figures become £10,000 to £20,000.
3. The spread betting operator who accepts these trades does not bet against the customer, but lays off the trade elsewhere. Ultimately, I suspect, the trade is accumulated in some form of derivative transaction on a futures exchange, but I do not know. The operator, however, by laying off the bet elsewhere seeks to profit by means of the spread. The means by which it does that, and the terms on which it does that, however, are not a matter for the operator's customer: nor, in the present case, have the applicable terms been disclosed."
Ms Barton KC and Mr Lewis represented Mr Tchenguiz, in the CMC Spreadbetcase as they did before me. In that case, as appears from paragraph 6 of the judgment, they also advanced the NBP Defence as a result of alleged breaches of COBS by CMC in re-categorising him as an EPC. The judge did not need to address the NBP Defence because he found there was no such breach: see paragraphs 90 and 91 of the judgment.
(12) Upon closing a Bet, subject to any Applicable Regulations:
(a) you will pay us the difference between the Opening Level of the Bet and the Closing Level of the Bet multiplied by the Stake if the Bet is:
(i) ...........
(ii) an Up Bet and the Closing Level of the Bet is lower than the Opening Level of the Bet;
.......
Unless we agree otherwise, all sums payable by you pursuant to Term 8(12)(a) and Term 4(1) are due and payable immediately upon the Closing Level of your Bet being determined by us and will be paid in accordance with Term 16. Sums payable by us pursuant to Term 8(12)(b) will be settled in accordance with Term 16(5)."
"15. MARGIN
INITIAL MARGIN
(1) Upon opening a Bet you will be required to pay us the Margin for that Bet, as calculated by us ("Initial Margin)". Note that the Initial Margin for certain Bets (for example, Bets on Shares) will be based on a percentage of the notional value of the Bet and therefore the Initial Margin due for such Bets will fluctuate in accordance with the notional value of the Bet. Initial Margin is due and payable to us immediately upon opening the Bet (and for Bets that have a fluctuating Initial Margin based on a percentage of the notional value of the Bet, immediately on opening the Bet and thereafter immediately on any increase in the notional value of the Bet taking place) unless:
(a) .................
(b) we have categorised you as a Professional Client and we have expressly agreed to reduce or waive all or part of the Margin that we would otherwise require you to pay us in respect of a Bet. The period of such waiver or reduction may be temporary or may be in place until further notice. Any such waiver or reduction must be agreed in writing (including by email) by a director, an authorised signatory or relationship manager of ours or a member of our credit or risk departments (each an "Authorised Employee") in order to be effective. Any such agreement does not limit, fetter or restrict our rights to seek further Margin from you in respect of the Bet at any time thereafter; or
(c) ............
MARGIN
(2) Where we have categorised you as a Professional Client, you also have a variation Margin obligation to us to ensure that at all times during which you have open Bets, you ensure that your account balance, taking into account all realised and/or unrealised profits and losses ("P&L) " on your account, is equal to at least the Initial Margin that we require you to have paid to us for all of your total open Bets. If there is any shortfall between your account balance (taking into account P&L) and your total Initial Margin requirement, you will be required to deposit additional funds into your account. These funds will be due and payable to us for our own account, immediately on your account balance (taking into account P&L) falling below your Initial Margin requirement unless:
(a) ............
(b) we have expressly agreed to reduce or waive all or part of the Margin that we would otherwise require you to pay us in respect of your Bet(s). The period of such waiver or reduction may be temporary or may be in place until further notified. Any such waiver or reduction must be agreed by an Authorised Employee in writing (including by email) in order to be effective. Any such agreement does not limit, fetter or restrict our rights to seek further Margin from you in respect of the Bet at any time thereafter;
(c) ......
...........
(4) Details of Margin amounts paid and owing by you are available by logging on to our Electronic Betting Services or by telephoning one of our employees. You acknowledge: (a) that it is your responsibility to be aware of, and further that you agree to pay, the Margin required at all times for all Bets that you open with us; (b) that your obligation to pay Margin will exist whether or not we contact you regarding an outstanding Margin obligation; and (c) that your failure to pay any Margin required in relation to your Bets will be regarded as an Event of Default for the purposes of Term 17.
...........
...........
(7) We are not under any obligation to keep you informed of your account balance and Margin required (i.e. to make a 'Margin call') however if we do so the Margin call may be made by telephone call, post, email, text message or through an Electronic Betting Service. The Margin call will be deemed to have been made as soon as you are deemed to have received such notice in accordance with Term 14(10). We will also be deemed to have made a demand on you if: (a) we have left a message requesting you to contact us and you have not done so within a reasonable time after we have left such a message; or (b) if we are unable to leave such a message and have used reasonable endeavours to attempt to contact you by telephone (at the telephone number last notified to us by you) but have been unable to contact you at such number. Any message that we leave for you requesting you to contact us should be regarded by you as extremely urgent unless we specify to the contrary when we leave the message. You acknowledge and accept that what constitutes a reasonable time in the context of this Term may be influenced by the state of the Underlying Market and that, according to the circumstances, could be a matter of minutes or even immediately. It is your responsibility to notify us immediately of any change in your contact details and to provide us with alternative contact details and ensure that our calls for Margin will be met if you will be uncontactable at the contact address or telephone number notified to us (for example because you are travelling or are on holiday, or you are prevented from being in contact because of a religious holiday). We will not be liable for any losses, costs, expenses or damages incurred or suffered by you as a consequence of your failure to do so."
"16.PAYMENTS, CURRENCY CONVERSION AND SET-OFF
............
..........
INTEREST
(4) You will pay interest to us on any sums due in respect of any Bet and any other general account charges (for example, market data fees) and Taxes, as applicable, that you fail to pay on the relevant due date. Interest will accrue on a daily basis from the due date until the date on which payment is received in full on your account in cleared funds, at a rate not exceeding 4% above our applicable reference rate from time to time (details available on request) and will be payable on demand."
[At all times material to this claim, IG's reference rate has been the daily LIBOR and then SONIA rate.]
17. DEFAULT AND DEFAULT REMEDIES
(1) Each of the following constitutes an "Event of Default":
(a) your failure to make any payment (including any payment of Margin) to us or to any Associated Company of ours in accordance with the conditions set out in Terms 15 and 16;
(b) your failure to perform any obligation due to us;
(c) where any Bet or combination of Bets or any realised or unrealised losses on any Bet or combination of Bets opened by you results in you exceeding any credit or other limit placed on your dealings with us;
(2) If an Event of Default occurs in relation to your account(s) with us or in relation to any account(s) held by you with any Associated Company of ours, we may, at our absolute discretion at any time and without prior notice take any one or any number of the below steps:
(a) close, part-close or amend all or any of your Bets at a Closing Level based on the then prevailing quotations or prices in the relevant Underlying Markets or, if none, at such levels as we consider fair and reasonable and/or delete or place any Order on your account with the aim of reducing your exposure and the level of Margin or other funds owed by you to us;
...............
...............
(3) If we take any action under Term 17(2), we may, where reasonably possible, take steps to notify you before exercising such rights. However, we are not obliged to do so and any failure on our part to take such steps will not invalidate the action taken by us under Term 17(2).
(4) If an Event of Default occurs, we are not obliged to take any steps set out in Term 17(2) and we may, at our discretion, allow you to continue to place Bets with us, or allow your open Bets to remain open.
(5) You acknowledge that, if we allow you to continue to place Bets or to allow your open Bets to remain open under Term 17(4), this may result in you incurring further losses.
(6) You acknowledge and agree that, in closing out Bets under this Term 17, it may be necessary for us to 'work' the order. This may have the result that your Bet is closed out in tranches at different bid prices (in the case of Sells) or offer prices (in the case of Buys), resulting in an aggregate closing level for your Bet that results in further losses being incurred on your account. You acknowledge and agree that we shall not have any liability to you as a result of any such working of your Bets."
A firm may treat a client other than a local public authority or municipality as an elective professional client if it complies with (1) and (3) and, where applicable, (2):
(1) the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the "qualitative test");
(2) in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:
(a) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
(b) the size of the client's financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
(c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged;
(the "quantitative test"); and
(3) the following procedure is followed:
(a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;
(b) the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and
(c) the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.
(a) the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;
(b) the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and
(c) the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections."
"Before deciding to accept a request for re-categorisation as an elective professional client a firm must take all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the relevant quantitative test."
I refer to those tests below as the 'Qualitative Test' and the 'Quantitative Test' respectively.
"A firm must ask the client to provide information regarding that client's knowledge and experience in the investment field relevant to the specific types of product or service offered or demanded to enable the firm to assess whether the service or product envisaged is appropriate for the client."
An investment firm shall be entitled to rely on the information provided by its clients or potential clients unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete."
The liability of a retail client for all restricted speculative investments connected to the retail client's account is limited to the funds in that account."
"(1) Subject to COBS 22.5.7R and COBS 22.5.7AR, a firm must not:
(a) market, publish, provide or communicate in any other way any communication or information in a durable medium or on a webpage or website to a retail client, or in such a way that it is likely to be received by a retail client;
(b) approve or communicate a financial promotion in a durable medium or on a webpage or website; or (c) disseminate such a communication, information or financial promotion to a retail client, or in such a way that it is likely to be received by a retail client,
unless the firm includes one of the following risk warnings, as appropriate.
(1A) Subject to 1B, if a firm markets, distributes or sells:
(a) ........
(b) leveraged spread bets; or
(c) ............
the firm must include the following risk warning:
"CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. [insert percentage per provider]% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money."
"Investment firm shall ensure that the information referred to in paragraph 1 complies with the following conditions:
............
(b) the information is accurate and always gives a fair and prominent indication of any relevant risks when referencing any potential benefits of an investment service or financial instrument,
(c) the information uses a font size in the indication of relevant risks that is at least equal to the predominant font size used throughout the information provided, as well as a layout ensuring such indication is prominent,
(d) the information is sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received,
(e) the information does not disguise, diminish or obscure important items, statements or warnings
"This is a HNW individual that wants to open an Account with us. On discussion with Tom he suggested running some initial background screening since the client has recently been involved in a (now settled) court case. Would you mind getting someone to look into this before we get him to open and probably proceed to ERC for Credit etc. He is a well known property mogul and used to do business with Spreadex years ago, I'd like to make sure we are all happy before beginning the process with him since we will only get one go at onboarding him and getting his business. If possible please can we look into this asap....client has already contacted Pete."
I have done a bit of background check on the client and here are his details - Born in 9 September 1960 Tehran, Iran. Currently residing in the UK
- Occupation - Property investor
- Source of wealth - real estate, has stakes in some of Britain's biggest companies, such as Sainsbury's, House of Fraser and pub group Mitchells & Butlers.
- As per RDC/Finscan and web search - "he was arrested in 2011 in a raid conducted by the UK Serious Fraud Office (SFO) in relation to an investigation into the collapse of Kaupthing Bank in 2008, according to public media sources. He was charged with fraud and market manipulation. In 2012, the charges against him were however dropped by the SFO citing lack of evidence against him and he was awarded £1.5 million in 2014 to settle wrongful arrest claims."
The search results are attached to this email. Please do let me know if you need any further details.
Please find attached the background results. As suspected a messy history, but he's since being cleared of charges and resolved the related lawsuits so would not be blocked for an account in principle. Just FYI @Tom Leyhane.
As the checks will still be run again by AO, I'd suggest forwarding this chain when you know the App has come in, so they can mark the client as a confirmed match and record that the risk has been accepted, otherwise there will likely be some back and forth delay. Given what we know about the client, please sense check that any details we store on source of wealth are sensible and representative of the true figures and sources.
In order to get the account set up in the most margin efficient manner, and to ensure you can earn a volume based rebate each month. It is worth upgrading your account to "Professional" status.
In order to do this you need to satisfy 2 out of 3 criteria (ESMA Regulation).
2. Have traded leverage over the past 12 months, over 40 trades. If you have traded elsewhere over the last year, please send me an annual statement or monthly statements etc.
3. Worked in a professional capacity dealing in derivative products for clients.
I am hopeful you will pass the above on points 1 and 2. As I say we can forgo point 1, but would it be possible to show past evidence of leveraged trading at all.
"I understand the risks of spread betting and CFD trading and I have read the Risk Disclosure Notice, which I agree is provided to me on the IG website.
Professional clients can lose more than they deposit.
I have read, understood and agree to be bound by the Spread Betting and CFD Customer Agreements, which I agree is provided to me on the IG website. I confirm that I am a non-professional user for market data purposes or if I am a professional user I confirm that I will immediately contact newaccounts.uk@ig.com. I certify that the information given by me in this form is true and correct."
We've classified you as a retail client, giving you the highest level of protection under the regulatory system.
Your account includes negative balance protection, which means we won't allow your balance to remain below zero. Should your account fall into debit, you don't need to do anything - we'll adjust the balance to zero."
"But, you will waive some FCA protections as a professional client such as:
·Negative balance protection: As a professional client you will have an obligation to make additional payments should your account fall into a negative balance.
·Restrictions on CFD's, spread bets and binaries: The regulator has imposed leverage restrictions and other measures such as standardised risk warnings as a way of protecting retail clients. If you choose to be a professional client we will not be obliged to restrict your account in this way, so these protections would not apply to you.
·Communication: When talking to our retail clients we need to use clear language, and be very balanced when talking about the risks and benefits of leveraged trading. We can use more sophisticated language when talking to our professional clients.
First, confirm that you want to be treated as a professional client of IG.
I wish to be treated as a professional client by IG Markets and IG Index (together "IG") in respect of my existing account(s) (if any) and all future accounts held with IG. It is your responsibility to let us know if anything changes that might affect your eligibility to be classified as a professional client.
By clicking "confirm and continue", I understand that IG will treat this as a written request from me to be treated as an elective professional client."
"Based on the information you have provided in your assessment, we have determined that you don't meet the FCA's criteria to be classified as a professional client. This means your application has been unsuccessful on this occasion, and you are still a retail client.
If your circumstances change, you're welcome to reapply by logging in and going to 'settings' tab in My IG or on the IG trading app. If you think there's been a mistake and you should be classified as a professional client, please get in touch with us on details below and we will be happy to look into this. ............".
"Thanks and thanks for applying for the Pro status online. Frustratingly the chap on Credit rejected it rather than first asking me to collate more information on R20 Advisory.
Please re-apply when you get a spare moment. I have asked that they park the application if we need more information as opposed to rejecting it.
I have to run to a meeting with a client now, but I have copied in my colleague Az who is aware of your account number and someone will call you once the money has arrived to take a trade."
"I believe you were involved in the approval for opening an account for the above client.
The client is looking to become professional and applied under his experience and investments.
This is what was declared on the application. Pete [Ward] has stated he used to be a Securities broker, which I'm struggling to find any evidence of online (given the many articles surrounding court cases etc)
I have however found the below link regarding the court case which highlights Tchenguiz Discretionary Trust (TDT) trading CFD's.
Do you think this would be sufficient to meet the professional experience criteria? Or we would need to gather more information from the client to satisfy."
"I'm [sic] be happy to use the experience you highlight in the extract below (para 13). I believe Rob Pike also has some historic context that the client traded CFDs heavily at Spreadex (which we couldn't use on it's own) but it's helpful context to validate the below.
When going through the upgrade coms please confirm with the client @Peter Ward (or whoever is owning the coms) that the description used in the Pro upgrade form doesn't sound like it would qualify on its own (given that trading in derivatives is not mentioned), but we understand that he was/is one of the beneficial owners of TDT which traded in derivative products and CFDs as a matter of course and it's this that we have used to assess the account."
"As a professional client, negative balance protections will not apply to you. You will have an obligation to make additional payments should your account fall into a negative balance."
"Remember, it's your responsibility to let us know if anything occurs that might affect your eligibility to be classed as a professional. Should you wish to be recategorised as a retail client, please get in touch using the details below."
"Just a note for records, the description used in the Pro upgrade form didn't qualify on its own, however we understand you were one of the beneficial owners of TDT which traded in derivative products and CFD's as a matter of course and it is this we used to assess the application."
We are writing to you regarding your request to upgrade your account ending **Y38 to a Select Account with credit facilities. Please confirm by reply to this email that you agree to the terms mentioned below and we will proceed upgrading your account. We will confirm by email once the changes have been made.
If your account becomes marginable you will have until 3pm the next business day to supply sufficient cleared funds into your account. We may contact you in this event, but we are under no obligation to do so. Please be aware that if we do not hear from you or receive payment your positions will be at risk of being cut back or closed out to cover the margin call, and therefore you may suffer losses greater than the funds on your account.
If you are in any doubt as to the action required to keep your positions open, we urge you to contact us. Where we believe it reasonably necessary, for example where your position gets significantly worse, we reserve the right to request immediate payment or close you out immediately (that is, before 3pm on the following business day). We also reserve the right to extend your payment terms.
Please note that it is your responsibility to monitor your account and ensure that your balance, considering all realised and unrealised profits and losses, is equal to at least the total initial and variation margin that we require you to have paid to us.
Credit facilities requested:
We will apply a Waived Deposit Limit (WDL) of £250,000. This allows you to open trades to this value without the need to deposit funds. Any additional margin incurred above this figure will need to be covered by depositing cash into your account. Please be aware that if you have a negative cash balance on your account you may be restricted from opening new positions until the balance has been cleared.
We will a set a Liquidation Level on your account of £0. This means that if your net equity (cash balance +/- unrealised profits/losses) falls to this level (equity of £0), we reserve the right to immediately liquidate all of your positions, irrespective of any margin deadlines you were previously given. We are under no obligation to contact you if this Liquidation Level is breached. Please note that this liquidation level is the point at which we will start closing positions and is the not maximum amount that you could lose. Losses may exceed this amount.
Essentially, you should monitor your account to cover potential adverse market moves. This can be managed by adding extra funds to your balance or by using Stop Orders to help limit any potential losses on your trading positions.
....................
The Liquidation Level has been set based on various factors, including, but not limited to, evidence you may have provided of your financial circumstances. Please note that IG reserves the right to revoke or amend the characteristics and features of your account at its discretion without prior notice (for example your Liquidation Level, different margining procedures, margin rates, trading and deposit limits and risk protection features). Upon request, you may be required to provide additional evidence of funds to maintain your account type and credit facilities.
Interest may be charged on any debit balance incurred on this account that is not cleared within 30 days of the last trade date. This is solely at IG's discretion and will be communicated to you in writing before any action is taken. Any interest charged in this way will be done in accordance with Terms 16(4) and 22 of your customer agreement with us.
IG also reserves the right to downgrade this account with due notice if we deem that the account is no longer appropriate.
These terms are in addition, and supplemental, to your customer agreement with us. These terms shall be governed, construed and interpreted in accordance with English law and the courts of England and Wales will have non-exclusive jurisdiction to settle any legal action or proceedings arising out of or in connection with these terms, including any non-contractual disputes and claims.
Following a review of your IG account ("TXY38"), this is to confirm that you have been approved a maximum equity margin rate of 30% on your Account.
The maximum equity margin rate controls the margin for your equity positions at a maximum of 30%.
The margin concession is at IG's discretion and is subject to regular reviews. A review considers a wide variety of factors, which includes but is not limited to, liquidity, volatility, concentration and notional value. You will however be notified of any changes. We endeavour to give 2 weeks' notice but the notification period may be less if the risk profile of the account significantly changes.
Please contact us if you have any questions regarding the margin concession."
"It's a part and parcel of setting up the account in a way that I deemed that he would want it to be from the introduction that I had, and also on the basis of what I knew about the client and trading elsewhere and such. So I was being -- yes, I was basically saying what I knew from him was once the money was in, he would want to trade, but he would want to be on preferential terms."
"Q. And the benefits that you specifically mention are that you say it's the most margin efficient manner; do you see that?
A. Yes. With professional you get the lower margin rate.
Q. And that he can earn a volume-based rebate each month as well?
A. Yes, that's correct.
Q. In your paragraph 12, you also say that: "... certain advantages for Mr Tchenguiz would follow." Do you see the end of that first sentence? And that's the advantages that you were referring to, is it, different margin rates?
A. That's correct, yes. Better margin rates and different cost structures. Which only a professional client would be able to access."
"Q. So in respect of your assessment of qualitative test for Mr Tchenguiz, the process was, without wishing to denigrate it, it was as simple as saying: I can see a MiFID score of 100, I know 100 passes for present purposes --
"In terms of the design of this scoring, I would have had heavy -- I did have heavy involvement in reviewing that scoring based on FCA guidance particularly related to the appropriateness assessments in the CFD sector for example and in considering whether or not there was an appropriate application of the MiFID score to this procedure."
"In the way that IG has undertaken its adequate assessment, we believe that more recent trading experience is typically more relevant to the qualitative test."
"I think you will have an understanding that they traded derivative products which contained significant complexity. That could be leverage, it could be transparency, it could be counterparty risk, it could be complexity of pricing."
"Q. Okay. You can see there there's another table called "Relevant Experience". And the first point, question 1: "Over the last three years, how many times have you traded the following products?" And, as you say, that's because you consider that more recent experience tends to be more relevant experience in general terms?
A. For the appropriateness assessment, that's certainly true. As when we look at whether this information is relevant to the professional case, we're using the same table, we're using the same standardised table, yes.
Q. I see. And we can see that the way that this table works, in broad terms, is that points are attributed for particular frequencies of dealing with particular different categories of product; is that correct?
A. Yes.
Q. So if you have traded OTC derivatives -- which includes spread bets, effectively, doesn't it? -- more than 20 times in the last three years, you'll get the magic number of 100, and be instantly entitled to open an account as a professional; is that correct?
A. I wouldn't say you would be "instantly entitled".
Q. Okay, sorry. For MiFID score purposes. I'm not trying to trick you into something --
A. The application of the standardised test, I agree with, that if you have traded -- if in June 2018 you had traded OTC derivatives more than 20 times in the last three years, that would be enough to get a MiFID score of 100.
Q. Okay. And the three-year cut-off point, is that because -- you say that's an internal view that's been taken by IG. Is that because, with the passage of time, you think the familiarity with products fades?
A. Not necessarily. I believe the three-year point is -- I believe that at the time we believed that the three-year point was industry practice for an appropriateness assessment. There had been various guidance issued on appropriateness assessments by the FCA.
Q. Okay. Well, there's an obligation in 10A, isn't there, to use information that's not manifestly out of date, inaccurate, or incomplete, isn't there?
"I don't know that I agree that it's less exacting. I think the language in COBS 10A, particularly lower down, is very prescriptive about the type of information which a firm is required to gather to assess knowledge and experience for appropriateness. Whereas in the professional rules in 3.5.3, there is more subjectivity given to a firm as to what they may consider is the relevant knowledge, experience and expertise.
What I do think is that, given the different nature of the products, you would assume a higher bar is required to understand increased risks, because the two accounts have different risks."
"IG makes use of the information that it has gathered through the appropriateness assessment in its adequate assessment as required in COBS 3.5, that's true."
".... the policy intention, which remains true, and was true at the time, was that when we considered the language in COBS 3.5.3 that you should make an assessment of expertise, knowledge and experience, there are various ways you could do that. That could include simply asking a client "Do you understand?""
"IG's position was, and still is, that you should apply more weight to experience, because that is a more helpful measure, typically, of whether a client really understands those risks because they may have experienced it."
"So levels of practical experience we believe were more important than self-certification that you had knowledge."
and
"Our view was that -- our view was that, and remains, experience is more relevant than someone being able to simply confirm they understand the risks. Obviously a client is saying they understand the risks is still something the firm can take into account."
"In my previous witness statement of 14 April 2021 I stated that I opened the judgment itself and considered it in some detail in addition to the extracts. I do not now expressly recall doing this but it is highly likely that I would have done so because: (a) as a matter of general practice, and in line with my general approach outlined above, I always check the primary source of any information provided to me; and (b) my recollection as at the time of preparing my statement of 14 April 2021 was that I did do this and I specifically recall the paragraphs explaining Mr Tchenguiz's dealing on behalf of his family through R20 Limited and references to contracts for differences."
"Yes. I think again, thinking of the way that I approach things, the email from Kelsey with the extracts at the end don't necessarily make a lot of sense in isolation -- I used that word again -- so you would have needed to refer to the whole document to actually understand what it is you were looking at. Possibly not the whole document, but at least to get a flavour of what it was trying -- what it said."
"So I think if you ... sorry, if you look at the two extracts, I think it's sort of piecing the pieces of the puzzle together, making sure that the whole story is consistent. So you have the fact that, in paragraph 5, RT operated the businesses. That doesn't actually tell you what he did exactly, but on his application form he is telling us that he was a director of certain entities, including R20 entities."
And:
"So I'm sorry, I'm quite confused. I'm not sure I'm saying that it wasn't sufficient. I'm saying that it was part of the rationale to conclude that, alongside 6 his attestation he had professional experience, including the fact that he was an employee of R20, alongside this judgment which specifically said he operated businesses -- and I'm paraphrasing - he operated businesses that had exposure to products including CFDs. And I think, for me, the context of the SFO judgment, being that it was such a pivotal moment in his life, let's say, that would have been enough for him to really understand the effect of a CFD contract."
"A. It's what he believes, filling in that application form, is the most relevant to him.
Q. Most relevant employer.
A. Yes, indeed.
Q. And when it comes to the actual trading of the CFDs, although you make reference to Mr Tchenguiz having operated the businesses, which at its centre have the Tchenguiz Discretionary Trust, which is my paraphrasing of paragraph 5, but I hope you find it fair, a good summary of what that's telling you as a reader is the summary that Ms O'Connor gives at the bottom of page 590, which is it's a court case which highlights Tchenguiz Discretionary Trust trading CFDs, isn't it?
A. Yes.
Q. So you're going an extra stage and saying that because he had a position as a director of R20, that that's sufficient experience in the context of the rest of that judgment for you to understand that the trading by the trust is attributable professional experience to Mr Tchenguiz; is that correct?
A. So it's not necessarily relevant to me who placed the trades, which I think is part of your question. The only thing that matters to me is whatever happened within this very complex structure. Was it enough to give our client knowledge of CFDs and the risks of trading CFDs? And that's how I formed my judgement."
"According to the judgment I believe that's the case. But I think the key thing here is that Mr Tchenguiz had involvement in companies that gave him interests within CFDs. I think it's quite reasonable to assume that would have given him sufficient knowledge."
"5. Like many very wealthy businessmen, RT operated the businesses in which he had an interest through a complex structure based in an offshore location for fiscal reasons. At its centre from 26 M arch 2007 was the Tchenguiz Discretionary Trust (TDT) of which RT and his family were the principal beneficiaries."
"13. By the late autumn of 2007, the interests of RT through the TDT, with the substantial financial support of Kaupthing, had built up a significant share and property portfolio. It is apparent from contemporaneous documents that by that stage TDT held significant positions in Sainsbury plc and in Mitchells & Butlers. A significant part of the interests in Sainsbury plc and Mitchells & Butlers plc was held under CFDs (contracts for difference) and other forms of derivative contract; Kaupthing had from at least February 2007 provided some finance for these CFDs. At some stage its subsidiaries became counterparties to the CFDs and other derivatives. We set these matters out in more detail at paragraphs 121 and following."
"6. As is not uncommon, a professional trustee company was chosen to act as the trustees of the TDT. The company chosen was Investec Trust (Guernsey) Ltd and its associated company Bayeux Trustees Ltd (to whom we will jointly refer as Investec), part of the large and well- known Investec group of companies, listed on the London and Johannesburg Stock Exchanges. Investec remained the trustees until the summer of 2010 when the role of the trustees was transferred to Rawlinson & Hunter SA (Rawlinson & Hunter), another international company specialising in the provision of private client services to the very wealthy. Rawlinson & Hunter are the claimants in the first of these judicial review proceedings. We return to the role of Investec at paragraph 107 below.
7. Again, as is common in this sort of arrangement, although the lawyers and other advisors in relation to complex transactions would be retained by the trustees, the trustees would need to know how the investments and transactions by the TDT were to be made in the interests of RT and his family. R20 Limited (R20), the second claimant in the second judicial review proceedings is a UK company owned by the TDT and based in London of which RT was a Director. R20 was the entity through which the trustees were instructed as to how RT and the beneficiaries wanted the investments made and which transactions should be effected. It is important to point out that although the trustees were not bound to do what they were told to do by R20, they would almost always do so. For fiscal and other reasons, such structures are premised on the understanding that trustees make the ultimate decision, that they are not bound to do what they are told to do by the beneficiaries and, of paramount importance for these proceedings, the trustees are responsible for satisfying themselves as to the lawfulness of all transactions they enter into.
8. Thus instructions by the beneficiaries to the trustees are for these reasons usually termed "advice" even though the instructions are almost invariably acted upon. Trustees of independent stature are normally scrupulous to ensure that the lawyers retained on complex transactions formally advise them. A consultancy agreement was made between Investec and R20 in October 2007 which formally set out these arrangements for such "advice".
9. Again, as is common, the TDT used offshore companies, including companies or other entities known as Special Purpose Vehicles (SPV), for individual transactions. Principal amongst the companies from December 2007 onwards was a group of companies controlled by Oscatello Investments Ltd (Oscatello), a British Virgin Islands (BVI) company, owned by the trustees of the TDT."
...................
"(iii) Kaupthing Bank and its relations with RT
11. Kaupthing, at the time the largest bank in Iceland, was one of the Icelandic banks that made significant loans for the purposes of the acquisition of assets outside Iceland to companies and individuals who had little connection with Iceland. It had subsidiaries in Luxembourg and London, including Kaupthing Singer and Friedlander.
12. It appears that the first business transacted between Kaupthing Bank and the interests of RT was in 2004 when RT's interests purchased, with the financial support of Kaupthing, the Odeon Cinema chain in the UK. There then followed a number of other transactions, including the purchase with Barclay s Capital Ltd and a private equity group, of Somerfield plc, a supermarket chain in the UK and the purchase of other strategic holdings including holdings in J Sainsbury plc, in Mitchells & Butlers plc, in Kaupthing and a 5% stake in Exista Hf (Kaupthing's largest shareholder with 25% of its equity)."
"108. The Information" - (i.e. the presentation made to the judge in the Central Criminal Court for the issue of search warrants) - "referred to Investec as a trustee of the TDT and explained its role as follows:
"Each trust is managed by Trustees and Joint Trustees appointed to operate the business of the trusts. Nominee company directors are appointed by the trustees to manage the day to day activities of the multiple holding companies and Special Purpose Vehicles (SPV) set up to perform specific activities within the structure. The brothers retain, respectively, the UK R20 and [Consensus] to advise and provide instructions to the nominee directors."
A little later, the Information stated:
"The Trustee companies set up to operate the TDT were: Investec Trust (Guernsey) Ltd, Bayeaux Trustees Ltd. Both above Trustee Companies acting as trustees for both TFT and TDT."
The statement that Investec was set up to operate the TDT was repeated elsewhere in the Information.
109. The Information did not explain the role of Investec in any of the transactions or that it was part of a well-known financial group. As we shall set out, in some of the transactions, Investec, although instructed by RT through R20 to enter into the transactions, took advice and then had to decide for itself, under the arrangements which we have described, whether to enter into the transactions.
110. We accept that obviously the fact that a trustee company is interposed in a transaction does not mean that there can be no criminality; as Mr Eadie put it: "It is not a crime cut out". We also accept there was powerful material that showed that the actual deal making between Kaupthing and TDT was done by RT, as would be usual in this type of arrangement. However, in a case where suspected criminality is alleged in a transaction and a trustee is formally the party who enters into the transaction and signs the documents, often after taking his own advice, it is plainly material that the role the trustee perform s is explained, particularly when the trustee is a well-known trustee company."
(1) contains no references to Mr Tchenguiz himself making any investment decisions in relation to the TDT whether in paragraph 13 or as a whole;
(2) strongly suggests the contrary by emphasising throughout the decision- making role of the TDT's professional trustees, and the use of reputable advisors and the lack of evidence of decision-making by Mr Tchenguiz;
(3) referred to Mr Tchenguiz's directorship of R20, which is a different company to R20 Advisory (identified by Mr Tchenguiz in his EPC Application);
(4) therefore contains evidence of experience of TDT (rather than Mr Tchenguiz), which is irrelevant. COBS 3.2.3R (headed 'Who is the client?') explains that a beneficiary of a trust is not a client where services are provided by a firm to a trust; and
(5) was manifestly out of date by the time IG came to rely upon it.
Mr Tchenguiz also says that IG failed to comply with COBS 3.5.3(3) in that (per paragraph 23 of the Amended Defence) IG "provided no sufficiently "clear written warning of the protections and investor compensation rights" he might lose for the purposes of COBS 3.5.3(3)(b) in light of COBS 4.5A, or at all." The Amended Defence particularises the respects in which IG's email communications and online forms were allegedly deficient in this respect. The reference in IG's application form to the loss of NBP is said to be insufficient because it did not clearly explain that the liability of a retail client for all restricted speculative investments connected to the retail client's account is limited to the funds in that account (per COBS 22.5.17) and reference to an "obligation to make additional payments" does not explain that, without NBP, a professional client is exposed to unlimited losses.
a)satisfying the Quantitative Test (i.e. two of the criteria in COBS 3.5.3(2)) is an indication that the client may be treated as a professional client. However, it may not be sufficient. "Depending on the circumstances (e.g. the category of products the client intends to trade), a more thorough analysis of the client's expertise, experience and knowledge may be required.";
b)firms should use their discretion to use the reasonable steps needed. They should "avoid relying solely on self-certification by the client and should consider obtaining further evidence to support assertions that the client meets the identification criteria at that point in time, notably when they consider that the documents or statements received from the clients are not sufficiently conclusive."
"a contract for differences that is a gaming contract, whether or not section 412 of the Act (Gaming contracts) applies to the contract; in this definition, "gaming" has the meaning given in the Gaming Act 1968, which is in summary: the playing of a game of chance for winnings in money or money's worth, whether any person playing the game is at risk of losing any money or money's worth or not".
"Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading Spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit."
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading Spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Professional clients can lose more than they deposit."
My interpretation is also consistent with the decision of Flaux J (as he then was) in Bank Leumi (UK) Plc v Wachner[2011] EWHC 656 (Comm). In that case the court was concerned with rules in the then Conduct of Business Rules (in COB 4.1R) which required a firm to take reasonable care in determining that a client had sufficient experience and understanding to be classified as an intermediate customer. The judge was addressing the client's claim for damages for breach of statutory duty (then under section 150(1) of FSMA) based upon an alleged contravention of that rule. He recognised (at [213]-[220]) that previous cases emphasised that the client classification rules were process driven. Their focus was upon the firm's compliance with procedural requirements rather than it arriving at an objectively correct classification of the client. Flaux J said this of the rules under consideration (with his emphasis) at [214]:
"In other words, before conducting designated investment business with or for a client, the firm must take reasonable steps to establish whether the client is an intermediate customer and it will only be if the firm has taken those reasonable steps that it is entitled to classify that client as an intermediate customer. ........"
"IG's policy is that a client must have direct experience of trading (including leveraged derivative trading) to equate 100 points in the appropriateness assessment to be considered to have sufficient understanding to be a professional client."
"75. Although I have considered the efficacy of the warnings in general terms, and in the light of COBS 4.5A.3, I have also taken into account when considering "a person in the position of the Defendant" as pleaded, that Mr Tchenguiz was experienced in the spread betting market and I have referred on a number of occasions to his overall positions, equivalent to 81m shares, across many SBFs and the fact, as he confirmed, that he was categorised as a professional client with other firms. It is also relevant that he was aware of the advantages of being a professional client and had gone to CMC because of the reduction in his position required by RJO and would, in all likelihood, have gone elsewhere had CMC not agreed to treat him on professional terms."
And, later, after reviewing the professional account opening documentation in that case:
"85. I am therefore satisfied that CMC complied with the regulatory requirements of COBS 3.5.3R(3) with regard to the need to give clear written warnings concerning the loss of NBP, both in general terms, from an objective point of view, having regard to the requirements of COBS 4.5A.3 and also having specific regard to the circumstances, knowledge and experience of the Defendant."
"A contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty."
"We propose to permanently restrict the sale, marketing and distribution of CFDs and CFD-like options to retail clients. We propose doing this by requiring firms that carry out these activities in, or from, the UK to:
• limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides
• close out a customer's position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account
• provide protections that guarantee a client cannot lose more than the total funds in their CFD account
• stop offering monetary and non-monetary inducements to encourage trading, and
• provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses."
"So, my Lord, I think the proper analysis, contractually, is that there is one agreement, which is the original agreement, and it then, at a later date, incorporates these terms [i.e. the Select Account terms] additionally. Not that there are separate agreements.
And that's probably how you get away with it [i.e. the Select Account terms] being quite pithy and short, not lots of definitions and the like, because it's intended to be read as part of the original contract."
"Our final rules for CFDs would apply from the date the ESMA restrictions expire, if not earlier. ...... Firms must continue to comply with ESMA's decision notice that imposes temporary restrictions on the marketing, distribution or sale of CFDs to retail clients. Should EU law cease to apply in the UK before ESMA's decision notice expires, ESMA's decisions will continue to apply as part of UK law."
IG Index Ltd v Ehrentreu[2013] EWCA Civ 95 concerned a settlement agreement which the defendant, as a client of IG, had entered into to suspend legal action for the recovery of a debt incurred on his spread betting account by agreeing to pay it in instalments. IG had sought summary judgment against him relying on the settlement agreement. That application had been largely successful before the Master and wholly successful on a subsequent appeal to the judge. The defendant had argued that IG were in breach of the customer agreement, also in breach of its regulatory obligations in seeking to enforce the settlement agreement, and, alternatively, that he had a counterclaim for damages which he could set off against his liability to IG. At the time, the provisions now in section 138E(1)-(2) were contained in section 151(1)-(2) of FSMA.
"In my judgment the "transaction" with which we are concerned is the Settlement Agreement. It is plain from section 151 (1) that entry into the Settlement Agreement is not illegal in the sense of being a criminal offence. It is plain from section 151 (2) that it is not made unenforceable as a result of a contravention of a rule. Once Mr Gourgey's attention had been drawn to section 151 he rightly abandoned this line of argument."
In Marshall v Barclays Bank plc[2015] EWHC 2000 the court was concerned with the enforceability of an interest rate swap which the claimant alleged the bank had "mis-sold" to him. The bank applied for the striking out of the claim, or reverse summary judgment, and the claimant sought to amend his particulars of claim so as to further particularise existing allegations of mis-selling and to add new ones. The draft amended particulars of claim made a specific allegation of a breach of COBS 2. This was another case where the customer had entered into a settlement agreement, itself supplemented by a later agreement when he found he could not meet the payments under the first, in compromise of the bank's claim under the loan (the interest payable on it having been hedged by the swap).
"50. It seems to me that illegality or other breach of public policy simply does not avail the claimant in this case. The reality is that either a claimant in the position of Mr. Marshall can rely on breaches of regulations which he can establish afford him a civil remedy, which here he could do so but for the effect of the general release, or he cannot, because the statutory framework does not, on its true construction, allow him to do so, and no amount of repeated reference to wholesale, systematic, deliberate or even dishonest breach of the regulations will alter that fundamental position.
51. Furthermore, even if I was wrong about that, it appears to me, despite what Mr. Hurst submitted, that the effect of what is now s.138E(2) of the Financial Services Act , which specifically provides that no such contravention — that is a contravention of a rule made by a regulator — makes any transaction void or unenforceable, quite clearly means that it is simply not possible to advance an argument that, even in the case of alleged wholesale, widespread, systematic, deliberate and even dishonest breaches of the regulations, the underlying transaction is rendered void. I was, I am afraid, not remotely convinced by Mr. Hurst's appeal to what he characterised as the golden rule approach to statutory construction, whereby one can adopt a non-literal meaning to a statutory provision in such cases."
Those passages were applied by Phillips J (as he then was) in Marsden v Barclays Bank plc[2016] EWHC 1601. The judge said, at [60], that he was in full agreement with the reasoning of HHJ Stephen Davies. That was another case where the bank applied for summary judgment against, alternatively the striking out of a claim made against it on the basis it had mis-sold two interest rate swaps to the claimant. Again, the circumstances included him having entered into a settlement agreement with the bank in compromise of the bank's claim under the loan hedged by those agreements. Alongside allegations of deceit and breach of contract, the claimant had sought to impugn the settlement agreement (and the swaps) by reference to what Phillips J summarised (at [57]) as his case on "the Bank's massive mis-sale of interest rate hedging products [and] acting contrary to the principles, rules and guidance of the regulatory regime."
"The immediate difficulty facing the above argument is that the Swaps are private contracts, in respect of which the parties have well recognised rights and remedies, including recognised causes of action for breach of statutory duty. It is not arguable that regulatory failings, however widespread, entail that contracts are void or illegal,not least because the regulatory regime expressly provides to the contrary. What is now section 138D of the Financial Services & Markets Act 2000 provides a specified right of action for contravention of regulatory rules and what is now section 138E states that "No [contravention of a rule made by the FSA/FCA] makes any transaction void or unenforceable".
"The solicitors repeatedly emphasised the seriousness of the financial consequences for them if their appeal were to be rejected. This is not a new submission in cases involving challenges to CFAs. It was answered by Dyson LJ giving the judgment of the Court in Garrett v Halton BC[2006] EWCA Civ 1017, [2007] 1 WLR 554 at [27]-[30] where he said:
"27. ... The starting point must be the language of section 58(1) and (3) of the 1990 Act . It is clear and uncompromising: if one or more of the applicable conditions is not satisfied, then the CFA is unenforceable. Parliament could have adopted a different model. It could, for example, have provided that where an applicable condition is not satisfied, the CFA will only be enforceable with the permission of the court or upon such terms as the court thinks fit. There is nothing inherently improbable in a statutory scheme which provides that, if the applicable conditions are not satisfied, the CFA shall be unenforceable with the consequence that the solicitor will not be entitled to payment for his services. Such a scheme can yield harsh results in certain circumstances, especially if the client has not suffered any actual loss as a result of the breach. It can also produce results which, at first sight, may seem odd: ... . But the scheme is designed to protect clients and to encourage solicitors to comply with detailed statutory requirements which are clearly intended to achieve that purpose. The fact that it may produce harsh or surprising results in individual cases is not necessarily a good reason for construing the statutory provisions in such a way as will avoid such results....
30 ... To use the words of Lord Nicholls, Parliament was painting with a broad brush. It must be taken to have deliberately decided not to distinguish between cases of non-compliance which are innocent and those which are negligent or committed in bad faith, nor between those which cause prejudice (in the sense of actual loss) and those which do not. It would have been open to Parliament to distinguish between such cases, but it chose not to do so. The conditions stated in section 58(3)(c) and in particular the requirements prescribed in the 2000 Regulations are for the protection of solicitors' clients. Parliament considered that the need to safeguard the interests of clients was so important that it should be secured by providing that, if any of the conditions were not satisfied, the CFA would not be enforceable and the solicitor would not be paid. To use the words of Lord Nicholls again, this is an approach of punishing solicitors pour encourager les autres. Such a policy is tough, but it is not irrational. The public interest in protecting solicitors' clients required that the satisfaction of the statutory conditions was an essential prerequisite to the enforcement of CFAs.""
"It seems to me that if there is a contravention of COB 4.1.9R because the firm has failed to take reasonable care, there will inevitably also be a contravention of COB 4.1.4R and those contraventions will give rise to a right to bring an action for damages under section 150 of FSMA 2000. Furthermore, section 150(2) of the Act contemplates that the entitlement to bring an action for damages for contravention of a Rule may be excluded if the relevant Rule so provides. There is nothing in section 4.1 of COB to suggest that the right to bring a claim for damages for breach of statutory duty in respect of contravention of the classification Rules has been excluded."