British
and Irish Legal Information Institute
Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Rocker v Full Circle Asset Management [2017] EWHC 2999 (QB) (23 November 2017)
URL: http://www.bailii.org/ew/cases/EWHC/QB/2017/2999.html
Cite as: [2017] EWHC 2999 (QB)
[New search] [Printable RTF version] [Help]
QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
| DAVID ROCKER |
Claimant |
|
| - and - |
||
| FULL CIRCLE ASSET MANAGEMENT |
Defendant |
____________________
Ms Laura John (instructed by Reynolds Porter Chamberlain) for the Defendant
Hearing dates: 5, 6, 8, 9, 12 December 2016; 23, 25, 26, 27 January 2017 and 3 February 2017
____________________
Crown Copyright ©
- In this action, commenced on 6 March 2015, the claimant, David Rocker ("Mr Rocker") claims damages against the defendant, Full Circle Asset Management Limited ("FCAM") for breach of contract, breach of statutory duty and negligence.
- In May 2009, pursuant to an agreement between Mr Rocker and FCAM, Mr Rocker invested £1.5 million in a portfolio of investments managed by FCAM, known as the Inner Circle Portfolio ("the IC Portfolio"). In March 2014, Mr Rocker removed his investment from the IC Portfolio. At that time the capital value of his investment had fallen to £681,443. Mr Rocker claims not only the difference between these two figures, but also, as further loss, the amount by which he contends the value of the invested assets would have appreciated over that period, had FCAM adhered to its instructions. Mr Rocker alleges that these losses were caused by FCAM's breaches of the contractual terms and relevant applicable statutory rules and breaches of the common law duty of care and of collateral contract: in particular FCAM invested significant portions of the £1.5 million in highly risky investments in such a way as regularly to take the overall risk level of the portfolio above the agreed risk limits; and secondly failed to operate a promised "stop loss" policy that would have limited those losses.
- FCAM denies liability, contending that it and Mr Rocker had an agreed "bear" strategy for the IC Portfolio, which, until June 2012, had an agreed "medium, but flexible" risk profile, that the risk profile of the Portfolio did not exceed the agreed risk profile over the relevant period; that it was not contractually obliged to operate a "stop loss" policy and in any event, it did not breach such a policy, on its true meaning. In any event, Mr Rocker fully agreed to all the investments made in the course of the IC Portfolio. Finally, Mr Rocker's claim for opportunity loss is misconceived.
- The judgment addresses matters in the following sections:
- Mr Rocker is now aged 72 and retired. He had a long and successful legal and business career, holding senior and board level positions in prominent companies including in particular at Guinness Plc in the 1980s. He first became a client of FCAM in August 2005 in his capacity as a trustee of a private trust. Prior to investing with FCAM, he had a number of years' experience investing in the stock market, working through his stockbroker.
- FCAM is a private limited company, founded in 1990 and based initially in Orpington, and subsequently in Sevenoaks and whose principal activity is the provision of independent financial management and advice. It was formerly known as RH Asset Management Limited. In the relevant period between 2005 and 2014, John Robson was chief investment officer and investment manager responsible for Mr Rocker's account; Tony Marsh was, until 2011 an associate Director and one of FCAM's client relationship managers; and Andrew Selsby was an investment manager and is now the managing director and company secretary of FCAM. Its investment management committee comprised Mr Robson, as chairman, Mr Selsby and Mr John Miller as an investment analyst.
- Having met Mr Robson of FCAM in June 2003, Mr Rocker first became a personal client of FCAM in December 2005, when he appointed FCAM as his discretionary portfolio fund manager and invested £1 million in FCAM's investment portfolio known as the "Model Portfolio". At that time, Mr Rocker owned two properties outright, had monies invested in a portfolio, a PEP and an ISA amounting to about £500,000 as well as £3 million cash on deposit. He had no financial dependents.
- The agreed investment objective of the Model Portfolio was "medium term capital growth" and in December 2005 Mr Rocker signed a document "Attitude to Risk and Loss" ("the 2005 ATR Document") in which he indicated that he was a medium risk investor. The products in the Model Portfolio were structured so that they were "bearish", i.e. that they would grow in falling market conditions. FCAM's analysis of the market was that the FTSE 100 would fall and equities would suffer and it therefore adopted a non-standard or non-traditional (or "contrarian") approach to investment, investing in a manner so as to profit when markets fell. In November 2007, the Financial Services Authority ("FSA") introduced substantial changes to the regulation of investment management, through new Conduct of Business rules. In September 2008 Mr Rocker signed a further and new client agreement in respect of the Model Portfolio. During the period of operation of the Model Portfolio, there were a number of documented references to investment in bear funds, suggesting discussion of such investments between Mr Robson and Mr Rocker. Between December 2005 and May 2009 Mr Rocker's Model Portfolio delivered average annual growth of 9.7% equating to an overall increase of 34.6% in value. No complaint is made by Mr Rocker in relation to the Model Portfolio. He maintained that investment until 11 October 2016.
- In early 2009 Mr Robson approached Mr Rocker, inviting him to invest in a different portfolio, the IC Portfolio. This was a portfolio reserved to FCAM's clients with higher levels of funds. The IC Portfolio was intended to operate a similar strategy (at that stage "bearish") to that operated in the Model Portfolio.
- Following a meeting on 9 March 2009, on 30 April 2009 Mr Rocker indicated to Mr Robson that he wished to become an IC Portfolio client. On 7 May 2009 Mr Rocker concluded an agreement with FCAM ("the 2009 IC Agreement") to sign up to the IC Portfolio, signing the client agreement ("the Client Agreement") and an Appointment of Custodian Application form ("the Custodian Form"); and at the same time he was provided with a "suitability letter" ("the Suitability Letter"). No further assessment of Mr Rocker's attitude to risk was undertaken at this time. In the lead up to the conclusion of the 2009 IC Agreement, FCAM emphasised the objectives of capital preservation, outperforming cash on deposit, and applying an aggressive stop loss policy to prevent losses. Further Mr Robson explained that the strategy of the IC Portfolio was to seek to take advantage of falling equity markets worldwide i.e. a "bear strategy". Mr Rocker contends that, for the purposes of the IC Agreement, the earlier 2005 ATR Document, completed in respect of the Model Portfolio, applied and thus that it was agreed that he was a "medium risk investor". FCAM contends that the relevant applicable risk level was "medium but flexible". Under the terms of the Client Agreement, a performance benchmark was set, being a return on investment in a bank account linked to Bank of England base rate.
- On 12 May 2009 Mr Rocker invested in £1.5 million in the IC Portfolio. In July 2009 FCAM provided Mr Rocker with a "Risks Warning Schedule".
- Mr Rocker maintained his investment in the IC Portfolio from then until 17 March 2014. In that period of almost five years, there were many and frequent exchanges, communications and discussions between Mr Rocker and FCAM, and in particular Mr Robson, about the IC Portfolio generally and about particular investments within the Portfolio. Mr Robson and Mr Rocker developed a very close relationship, based on mutual respect.
- Whilst between March and June 2010, and again between March and August 2011, the value of Mr Rocker's IC Portfolio improved, overall the value declined, and ultimately fell substantially. By January 2011, Mr Rocker was expressing his unhappiness with having lost money in the IC Portfolio, but stated that he remained sceptical about equities and he agreed to stay invested. Nevertheless he wanted careful monitoring of the bear notes.
- Between July 2011 and August 2012 there was an FSA instigated investigation, under the provisions of the Financial Services and Markets Act 2000 ("FSMA"), into FCAM's practices, concentrating on the Model Portfolio. In summary, in an initial report – the s.166 report - there were very substantial criticisms of FCAM's practices in relation to risk assessment. As a result FCAM was required to improve its practices and to re-assess customer risk on a substantial number of customers. Following that process, the services provided to those customers were found to be suitable ultimately. No fine and no reprimand was imposed. This is explained further in paragraphs 98 to 104 below.
- In the meantime, according to FCAM, in September 2011, the performance benchmark for the IC Portfolio changed from Bank of England base rate to APCIMS Balanced Portfolio.
- In late 2011, "bear" positions in the IC Portfolio were increased. In January 2012, Mr Rocker expressed his disquiet about the strategy for his IC Portfolio and bear notes and later that month FCAM agreed to waive its management fees for two consecutive months. Mr Robson continued to be optimistic about markets falling and bear positions improving.
- In June 2012 Mr Rocker and FCAM entered into a fresh client agreement ("the 2012 Client Agreement") following the carrying out of a more detailed and sophisticated financial risk profile exercise, involving the completion of FCAM's own investment questionnaire ("the Questionnaire") and a FinaMetrica "personal financial risk profile" ("the FinaMetrica Profile"). This assessed Mr Rocker's attitude to risk as "balanced/medium" and ascribed a numerical value to such medium risk. However Mr Rocker accepted that the portfolio risk profile of the IC Portfolio, going forward, would be "medium/high". In January 2013 Mr Rocker entered into a further, fresh agreement for the IC Portfolio ("the 2013 IC Agreement").
- The performance of the IC Portfolio continued to decline and by the end of 2013 Mr Rocker was becoming increasingly concerned. At a meeting on 8 November 2013, he sought agreement from FCAM to put a floor of £750,000 in the value of the fund. FCAM declined. In February 2014 Mr Rocker sought indemnification from FCAM for the losses; FCAM said it was not in a position to do so. Finally on 17 March 2014 Mr Rocker removed his investment from the IC Portfolio, which was sold at a capital value of £681,443.
- Mr Rocker initially complained to FCAM and then to the Financial Ombudsman Service on 11 November 2014. These proceedings were commenced on 6 March 2015.
- Throughout the operation of Mr Rocker's IC Portfolio, Mr Robson undertook regular analysis of the markets and there were regular internal investment management committee meetings. FCAM kept Mr Rocker informed as to its analysis of the markets and as to the performance and value of his own IC Portfolio, by way of a fortnightly newsletter, scheduled telephone conferences or meetings every 2 to 3 weeks with the provision of written material and a valuation report; and regular, more detailed, formal valuations every 6 months.
- Mr Rocker's case is that, essentially, FCAM was a firm of discretionary management investment managers who invested on his behalf, pursuant to a highly risky and unusual "bear" strategy way beyond his risk profile and failed adequately to protect him from losses. In his pleadings, his case raised a multitude of strands of different causes of action said to arise from FCAM's conduct. However by closing argument, his case had been distilled so as to comprise a primary case and a secondary case.
- By his primary case, Mr Rocker contends that:
- Mr Rocker then goes on to allege that these breaches of contract and duty caused him loss, both in the diminution in value of his IC Portfolio and additional "opportunity" loss.
- As regards the Breach of Mandate claim, Mr Rocker contends as follows:
- As regards causation and quantum Mr Rocker contends as follows:
- Allied to this claim, but apparently distinctly, Mr Rocker alleges a breach of a contractual benchmark. The IC Agreements provided for a benchmark for the IC Portfolio to outperform, up to September 2011, the return if the investment had been placed in a bank account linked to Bank of England base rate and, after September 2011, to meet the APCIMS Balanced Portfolio Index In breach of clause 2.9 of the Client Agreement, FCAM failed to adhere to the asset allocation implicit in that contractual benchmark from time to time. Maintaining a portfolio which bore no resemblance to what was indicated by the benchmark led to the decline in value of Mr Rocker's IC Portfolio. Additionally, Mr Rocker contends, that this conduct amounted to a breach of COBS 6.1.6 in some unparticularised manner.
- As regards the Stop Loss claim, Mr Rocker contends as follows:
- Additionally, Mr Rocker contends that this conduct amounted to a breach of COBS rules, and in particular COBS 9.3.1 – in some unparticlarised manner.
- As regards the Regulatory/COBS claim, Mr Rocker contends that, in breach of COBS rules, FCAM:
- Additionally, as set out above, Mr Rocker alleges that the breach of mandate also amounts to a breach of COBS 9.3.1.
- Mr Rocker further claims damages for his "opportunity loss". If FCAM had complied with its contractual and regulatory obligations, the £1.5 million invested by Mr Rocker in the IC Portfolio would have risen in value by 21 March 2014. The counterfactual value of the IC Portfolio as at that date would have been, based on the relevant APCIMS indices over the period of time, £2,483,867 and, taking account of the above capital loss, the opportunity loss was an additional £861,182.
- FCAM's case, is, in summary, as follows. Mr Rocker was a highly experienced businessman and a sophisticated investor who was kept fully informed throughout the operation of his IC Portfolio of the nature and performance of the investments. FCAM did not exceed its risk mandate (or, if it did, it did so for only brief periods). As Mr Rocker well knew, there was no obligation to operate automatic "stop losses"; at most FCAM was required to monitor investments when a particular alert level was reached; there was no relevant breach of COBS and even if there were any technical breaches, they caused no specific loss.
- Essentially, Mr Rocker's claims are "hindsight" claims made following the poor performance of some of the individual investments held in the IC Portfolio and are an attempt to recoup investment losses through unmeritorious allegations of breach of duty by FCAM. The "bearish" strategy adopted with the full knowledge and consent of Mr Rocker turned out to be loss making and Mr Rocker lost money. That is unfortunate, but is inherent in the risks taken in investment.
- First, as regards the Breach of Mandate claim, FCAM did not fail to keep the IC Portfolio within its applicable risk profile:
- There was no failure on the part of FCAM to adhere to benchmarks, as alleged. Clause 2.9 of the IC Agreement operated as a performance benchmark and did not operate as an asset allocation benchmark. Similarly any performance benchmark under COBS does not circumscribe or limit the allocation of assets in a portfolio. In any event, a failure to outperform a performance benchmark does not constitute a breach of contract or COBS. A performance benchmark does not guarantee performance in line with that benchmark.
- As regards the Stop Loss claim:
- As regards the regulatory claim:
- If, contrary to FCAM's primary case, there were any relevant breaches of contract and/or COBS, then Mr Rocker's losses should be limited to losses on those individual trades which cause the IC Portfolio to breach the risk mandate from time to time. On the basis of a "medium but flexible" portfolio risk profile throughout, the loss is at most £70,921,74; on the basis of a medium portfolio risk profile up to June 2012, the loss is at most £141,742.66. Further the claim for opportunity loss based on performance benchmarks is misconceived.
- In the light of the parties' respective cases, the principal, issues in the case are as follows:
- In assessing the evidence before me, I bear in mind the observations in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm). Factual findings are best based on inferences drawn from documentary evidence and the known or probable facts; the value of oral testimony lies largely in the on opportunity to scrutinise the documentary evidence and gauge personality. Contemporaneous documents are of the utmost importance. This is particularly the case here where the relevant events happened up to 11 years ago. Where it is also necessary to assess the credibility of witnesses in general and as to particular aspects of their oral evidence, the presence, or indeed the absence, of documents to support the witness's evidence is highly material.
- In this case there is a very substantial documentary record, covering the period of Mr Rocker's involvement with FCAM from 2003 until 2014. This includes both substantial correspondence between FCAM and Mr Rocker, internal file notes made by Mr Robson and others of meetings, and telephone conversations and, regular performance reports provided by FCAM to Mr Rocker, deal sheets and internal investment committee minutes.
- In addition to the documentary evidence, I have received witness evidence from Mr Rocker, Mr Robson, and Mr Selsby and expert evidence from Dr Walford and Mr Goodyer. Each provided written evidence, either by way of witness statements or expert reports. With the exception of Mr Robson, each also gave oral evidence. Mr Marsh was not called to give evidence and FCAM offered no explanation for his absence. In these circumstances, the court may be entitled to draw inferences adverse to the party who might reasonably have been expected to call the witness: here, FCAM: see Wisniewski v Central Manchester Health Authority [1998] Lloyd's Law Reports (Med) 223 at 240, principles (1) to (4). Transcript references are denoted (day/page/line or day/page).
- Mr Rocker was cross-examined at some considerable length. He gave his evidence in a clear, confident and considered manner. Mr Rocker is a highly intelligent and sophisticated man, as might be expected from someone who has had such an impressive legal and business career. At times, he was quite willing to concede when his witness statement evidence was not correct - for example over whether risk was documented at the time of 2009 IC Agreement and over his understanding of the risk assessment carried out in June 2012. He was, understandably, aggrieved about the losses he had sustained in the IC Portfolio and about what he perceived as failures on the part of Mr Robson who he had liked, respected and trusted. Whilst in general, he was an impressive witness, certain aspects of his evidence lead me to be careful about accepting his evidence without support.
- First, he had a tendency to understate the level of sophistication of his knowledge and experience of financial matters. Before he entered into the Model Portfolio he had many years' active experience investing in the stock market (albeit mainly in traditional shares) which involved his own active participation. Moreover, before he entered into the IC Portfolio, he also had 3½ years experience of the discretionary management service provided by FCAM and FCAM's strategy and types of products. During that time he had been provided with explanations of bear notes and structured products and had demonstrated his level of understanding and participation in those investments. More generally, he had had many years of top-flight legal and commercial experience. Secondly, he understated his prior knowledge and understanding of bear products: for example, it is clear in August 2007 that the structure and terms of a Soc Gen bear note was shown and explained to him.
- Thirdly, on a number of occasions in oral evidence, his evidence about his recollection was confused. It was not always clear whether, in respect of a particular document, his evidence was that he had no recollection of what was recorded in the document or rather that his recollection was that what was recorded had not happened. A particular, and important example, is the file note of 9 March 2009 (see paragraph 131 below). At the end of his evidence, in response to a question from myself, he said that it was the latter. To the extent that this carries the implication that notes had been falsified, I do not accept that. Rather I believe that he gave that answer in order to bolster his case rather than out of a real recollection. In general, I consider that, understandably, he did not have much independent recollection of particular events going back many years, and so I treat with caution those instances where he said that he did recall, particularly where that is contradicted by relevant contemporaneous documentation. However, in some cases, it is not clear precisely what a contemporaneous document itself was recording; either what was discussed between the parties, or rather the writer's internal thinking at the time. That is a matter for consideration in each particular case: for example, the 9 March 2009 file note and 12 June 2012 file note.
- Mr Robson did not give oral evidence. I admitted his two witness statements into evidence, accompanied as they were by Civil Evidence Act notices. Sadly, he suffers from Parkinson's disease and I accept the reasons why he was not fit to give oral evidence. However, I approach his written evidence with a degree of caution: first, because, the medical reports accompanying the notices, do raise questions as to his ability now to recall events; and secondly, because his evidence has not been tested in cross-examination (for example, his evidence as to the meeting on 9 March 2009). Thus, standing on its own, I accord less weight to the evidence in his statements. However, this will not be the case where that evidence is supported by credible contemporaneous documents and thus can be accorded greater weight. Indeed there are many instances where there is such strong supporting documentary evidence.
- Mr Selsby was cross-examined for over two days. At times he was careful and helpful. He gave a helpful clarification of the distinction between customer risk profile and portfolio risk profile. However he had not been involved in the day to day dealings concerning Mr Rocker and his IC Portfolio and so, in that regard, his evidence does not assist. Moreover, substantial parts of his evidence were confusing. At times he was very defensive and also evasive in his answers.
- As regards the FSA investigation and the s.166 report, his witness statement evidence, made at a time before that report had been disclosed, was, at best, economical. In that evidence he downplayed the substantial criticisms in the s.166 report, which were subsequently disclosed, and sought to give the impression that Kinetic had cleared FCAM's conduct in relation to Mr Rocker's IC Portfolio, which in that report it had not.
- His evidence about whether, and to what extent, Mr Rocker's IC Portfolio was risk scored contemporaneously was highly confusing. In his witness statement he said he did not believe it was done regularly; in cross-examination he tried to backtrack from that suggesting Mr Robson did score it over time, and then shifted to referring to this as "monitoring".
- Further his evidence concerning Appendix 41 and its preparation and the 2013 risk scoring document prepared by Mr Miller ("the 2013 Miller document") was confused. In particular he gave conflicting evidence about when FCAM first started applying a mathematical methodology for net risk scoring, stating eventually in answer to my questions that the netting process was carried out as far back as 2006. His evidence about the risk scoring template was confusing. His evidence about the email of 11 January 2012 was evasive; he eventually conceded that it did include the IC Portfolio and in particular Mr Rocker's IC Portfolio. He conceded that there was no documented agreement as to risk (7/14).
- Whilst I do not consider his evidence to be wholly unreliable, in the light of these areas of difficulty, I treat it with considerable caution in respect of particular issues where it is sought to be relied upon by FCAM.
- Mr Rocker relied upon the expert evidence of Dr Thomas Walford. FCAM relied upon the expert evidence of Mr Grahame Goodyer. First expert reports were provided by Dr Walford on 14 October 2016 and by Mr Goodyer on 17 October 2016. Mr Goodyer also provided a quantum report dated 27 October 2016. The experts met in November 2016 and produced a joint memorandum dated 1 December 2016 ("the Joint Memorandum"). Dr Walford and Mr Goodyer each then produced a second report, dated 4 and 19 January 2017 respectively.
- Dr Walford is a man with very substantial experience in private banking and wealth management services, investment management, with an impressive CV, although in some ways in many different aspects of private banking. Before moving into merchant banking, he had an engineering background culminating in a Ph D. Overall his oral evidence demonstrated that he is knowledgeable on many of the issues and he gave his evidence confidently. He was, properly, prepared to accept points in cross-examination: for example risk scoring was a subjective process and there was scope for reasonable differences; and, in principle, net risk scoring is appropriate. At times he was apt to digress and give lengthy, somewhat didactic, expositions on tangential matters, rather than answering the question asked of him. In certain areas, his evidence was less satisfactory. His criticisms of FCAM's information gathering and communication processes relating to Mr Rocker amounted to little more than failure to keep adequate records. In relation to Mr Rocker's customer risk profile in relation to the 2009 IC Agreement, he had not sufficiently considered the events of January and March 2009 and the meeting in March 2009. More significantly, in relation to the important issue of diversification and net risk scores, he had not performed his own analysis nor done his own calculations.
- On the whole, I regard Dr Walford as being a reliable witness, attempting to assist the court, although his evidence did not in all respects cast light on the issues that matter.
- Mr Goodyer has qualifications and experience as an independent financial adviser, investment consultant and performance analyst. His experience and qualifications appear to have been at a somewhat lower level, although he has dealt more directly with investment portfolios and risk assessment and suitability.
- In his oral evidence, he sought to assist the court. His evidence in relation to FCAM's documentation and in relation to whether there was an agreed investment strategy was frank and helpful. He very fairly accepted that, in the period up to 2012, the gross risk scores of Mr Rocker's IC Portfolio were not acceptable and clearly in breach of mandate.
- However at times his analysis was not incisive and even muddled: first, his explanation, in cross-examination, of the basis for net risk scoring and correlation was confused: see paragraphs 197 to 198 below; secondly, his evidence on his understanding of "stop losses" and "alerts" was contradictory; thirdly, his explanation of the 0.5 tolerance and of flexing in the context of the relevant band for medium risk scoring was also confused. Finally, he understated his involvement in the preparation of the risk scoring methodology at Appendix 41 to his report. Thus, in general, he was a less impressive witness than Dr Walford.
- Both now and throughout the period 2009 to 2014 a firm is and has been required to sell only suitable financial products to their clients, to do so in a suitable manner and to perform their services so as to comply with prescribed principles. The principal sources of those principles have been the EU Markets in Financial Instruments Directive ("MiFID") (at the highest level) and the Conduct of Business Sourcebook (COBS) (at a more specific level). Non-compliance with COBS gives rise to a cause of action for breach of statutory duty, under section 138D(2) FSMA which provides:
- MiFID requires member states to address three broad areas of investment firm regulation. One of these areas are the provisions to ensure investor protection contained in Articles 16 to 30. In particular Articles 19 to 24 contain provisions to ensure investor protection. Article 19 MiFID is entitled "Conduct of business obligations when providing investment services to clients". These articles are implemented through the COBS rules and are not set out here.
- The implementation of MiFID in the UK has been effected by the Conduct of Business Sourcebook (COBS) and by the MFI regulations. COBS 1.1.1 provides that it applies to a firm with respect to the following activities carried on from an establishment maintained by it… in the United Kingdom:… (2) designated investment business". It is common ground that at all material times FCAM's relationship with Mr Rocker was regulated by COBS and that FCAM was under a statutory duty to adhere to COBS by virtue of section 138D FSMA. The detailed particular rules of COBS relevant to this case are set out below, as they arise for consideration. The general structure is as follows. Chapter 2 of COBS sets out "Conduct of business obligations". COBS 2.2 is headed "Information disclosure before providing services" and concerns information provided by the firm to the investor. COBS 3 provides for client categorisation, defining a "retail client" as a client who is not a "professional client" or an "eligible counterparty." (COBS 3.4.1). Mr Rocker was such a "retail client" of FCAM. Chapter 4 of COBS is entitled "Communicating with clients, including financial promotions". It applies to communicating with a client in relation to its designated investment business: COBS 4.1.1(1). COBS 4.5 deals specifically with communicating with retail clients, and subject to exceptions, applies to a firm in relation to, inter alia, "the provision of information in relation to its designated investment business". COBS Chapter 8 addresses client agreements. COBS Chapter 9 is entitled "Suitability (including basic advice)". It applies to a firm which makes a personal recommendation and also to a firm which manages investments. COBS 9.2 is headed "Assessing suitability" and concerns obtaining information from the investor. COBS Chapter 14 is headed "Providing product information to clients". This is concerned with the provision of information by the firm to the investor. COBS 14.3 is entitled "Information about designated investments." By 14.3.1, it applies "to a firm in relation to" activities including "making a personal recommendation about a designated investment" or "managing investments that are designated investments…".
- In this section, I set out the key documents relating to the conclusion of the 2009 IC Agreement and later IC Agreements. By way of background and as a matter of chronology, I refer first to relevant documents relating to the earlier Model Portfolio Agreement.
- On 20 December 2015 Mr Rocker entered into agreement with FCAM for the Model Portfolio ("the 2005 Model Portfolio Agreement"). The relevant documentation included (1) Investment Management Terms (2) Attitude to Risk & Loss (3) Investment Risk Definitions and (4) Terms of Business. These documents were sent to Mr Rocker under cover of a letter dated 15 December 2005 from Mr Marsh.
- The Investment Management Terms, signed by Mr Rocker, provided, inter alia as follows:
- On the same date, Mr Rocker signed the "Attitude to Risk and Loss" document (the 2005 ATR Document), which provided, inter-alia as follows:
- The Investment Risk Definitions document sent to Mr Rocker at the same time defined the different levels of risk. In his covering letter of 15 December, Mr Marsh commented on this document in the following terms:
- The Terms of Business, referred to at clause 3 of the Investment Management Terms, provided, as follows, inter alia:
- On 12 September 2008, FCAM sent to Mr Rocker a new Investment Management Agreement for the Model Portfolio, asking for a change in the custodian. It appears that Mr Rocker agreed to these terms. Clause 6 provided a disclaimer in the same terms as clause 7 set out above.
- By internal memo dated 7 January 2009, Mr Marsh reported to Mr Robson that, following recent "chats", Mr Rocker would be interested in the proposed Inner Circle service, stating:
- In cross-examination, Mr Rocker denied that he had ever used the words "portfolio plus" and certainly not leverage (5/6/14). He considered that FCAM, in its file notes, had exaggerated what he had said. He denied that by expressing interest in the IC Portfolio he was asking for something that was speculative. What he was being offered was something more intimate where he would receive a lot more information. In my judgment this file note does not necessarily record just what was discussed at the meeting but also records Mr Marsh's own comment and interpretation.
- By letter dated 21 January 2009, Mr Robson wrote to Mr Rocker about FCAM's "Inner Circle Offering", explaining that it would be for significant sums:
- The letter emphasised that there would be constant and detailed communication between the client and FCAM. Client input would be appreciated, "although we will ultimately have the discretion to make decisions". It continued:
- Mr Robson explained in his witness statement that this was to be contrasted with the Model Portfolio where the only "short" investments were in short equities. In evidence Mr Rocker said he saw the IC Portfolio as an extension of the Model Portfolio, but agreed it was something different (5/5/13-17).
- On 9 March 2009 Mr Marsh and Mr Robson met Mr Rocker at FCAM's offices. Not only were Mr Rocker's existing investments in the Model Portfolio discussed, but further details of the new IC Portfolio were given.
- Mr Marsh prepared a manuscript note of the meeting; it is not clear whether this was written during the course of the meeting, but from its somewhat rough and ready appearance, that seems quite possible. Mr Marsh's note recorded as follows:
- Mr Robson prepared a typed file note, itself dated 9 March 2009, of that meeting. This file note was not provided to Mr Rocker at the time. It stated as follows:
- Mr Rocker's evidence in his witness statement was that Mr Robson sought to persuade him that the FTSE and equity markets were heading for a further collapse and that the strategy behind the IC Portfolio would be to take advantage of that collapse. Mr Robson reassured Mr Rocker by his references to capital protection and "tight stop losses". Further he did not recall any discussion about his risk appetite at that meeting (see further paragraphs 130 to 136 below).
- On the next day, 10 March 2009, Mr Marsh wrote to Mr Rocker following the meeting. As regards the IC Portfolio, he wrote:
- On 30 April 2009, Mr Rocker informed FCAM of his intention to become an IC portfolio client. On 5 May 2009, FCAM wrote to Mr Rocker enclosing three contractual documents. In that letter, FCAM repeated the statement made by Mr Marsh in the letter of 10 March 2009, set out above, including the following:
- The letter then enclosed three documents for Mr Rocker to complete and return to FCAM: namely (1) Client Agreement; (2) the Custodian Form; and (3) Suitability Letter. The letter asked Mr Rocker to sign and return one copy of the first two documents; as regards the Suitability Letter, Mr Rocker was invited to "retain for [his] own reference". Mr Rocker signed the first two of these documents on 7 May 2009. Contrary to the suggestion in clause 1.2 of the Client Agreement (set out below), no Personal Review Questionnaire was provided or completed.
- The Client Agreement provided, into alia, as follows (with emphasis underlined):
- the equity of companies
- money market and related instruments;
- security subject to stabilisation;
- listed securities involving gearing;
- investments denominated in a currency other than the base currency of your portfolio;
- forward foreign exchange contracts;
- non-readily recognisable investments;
- hedge funds.
- The Risks Warning Schedule referred to at clause 10 of the Client Agreement provided, inter alia, as follows:
- the equity of companies;
- money market and related instruments;
- security subject to stabilisation;
- listed securities involving gearing;
- investments denominated in a currency other than the base currency of your portfolio;
- non-readily realisable investments;
- hedge funds.
- The Risks Warning Schedule then went on to set out in respect of each of those listed investments particular risks and explanations. As regards "Listed securities involving gearing", the Schedule provided:
- The Suitability Letter was addressed specifically to Mr Rocker and undersigned by Tony Marsh. The salient parts provided as follows:
- On 11 June 2012, Mr Rocker entered into a fresh client agreement with FCAM, covering both his Model Portfolio and his IC Portfolio (i.e. the 2012 Client Agreement). This was concluded as part of the "re-papering" exercise: see paragraph 104 below). In that agreement the risk category for the former was stated to be "medium", whilst the risk category for the latter was stated to be "medium/high". The terms of the 2012 Client Agreement are materially similar to those of the 2009 Client Agreement. As regards the benchmark, however, Clause 2.9 of the 2012 Client Agreement provided:
- On the same day, at a meeting attended by Mr Rocker, Mr Robson and Mr Chris Salacinski, two further documents were completed: a FCAM Investment Questionnaire (the Questionnaire) and a detailed FinaMetrica Personal Financial Risk Profile (the FinaMetrica Profile).
- The FinaMetrica Profile was completed by Mr Rocker. Under that survey, his risk tolerance score was 57, whilst he himself estimated his own score at 55. These scores fell at the bottom end of FinaMetrica's risk group 5 with a band of 55-64. Under the Questionnaire, this meant that a "medium risk" portfolio was suitable (i.e. for those with a FinaMetrica risk score between 40-65.)
- In the Questionnaire, signed by Mr Rocker, the following was stated:
- The Questionnaire also recorded in detail the composition of Mr Rocker's assets, his income and expenditure and his investment knowledge and experience, including stating expressly that he had knowledge and experience of derivatives, commodities and exchange traded products. In section 5, it went on to record Mr Rocker's overall investment objective, as being primarily to maximise capital growth, and his attitude to risk. It continued:
- The Questionnaire continued:
- In an internal file note of the same date, Chris Salacinski recorded what was discussed at the meeting on 11 June 2012, stating, as regards the IC Portfolio that:
- On 15 June 2012 Mr Robson wrote to Mr Rocker, enclosing the 2012 Client Agreement, the Questionnaire, the FinaMetrica Profile and other documents, stating, inter alia, as follows:
- Thus, when concluding the 2012 IC Agreement, there was an apparent mismatch between Mr Rocker's customer risk profile (assessed as "medium") and the IC Portfolio risk profile (agreed as "medium/high").
- In his witness statement, Mr Rocker stated that he was not informed that the level of risk that he was being asked to sign up to (medium/high) was different from the outcome of the FinaMetrica Survey. "When I signed the Second Client Agreement… I had no reason to believe that what John Robson had told me about my risk score was inconsistent with the results of the 'Survey' which I had just completed. His letter to me of 15/06/12 stated that my own risk score was in the crossover area: the high end of medium and the low end of high'. It is only since this litigation that I have become aware that my Survey score was not in the 'crossover' area, but was within the 'medium' range and did not go into 'high' at all". However I do not accept this complaint. In the Questionnaire itself, which Mr Rocker signed, the difference between his customer risk profile and portfolio risk profile was apparent.
- On 5 January 2013 Mr Rocker entered into a further fresh agreement in respect of his IC Portfolio (the 2013 IC Agreement). The accompanying Investment Management Agreement ("the 2013 Client Agreement") is in similar, but not the same, terms, as the terms of the 2009 Client Agreement. Clause 2.3 provided (in slightly different terms to those of clause 2.3 of the 2009 Client Agreement):
- Clause 2.10 was new and was headed "stop losses" and was in materially the same terms as clause 7 of the Investment Management Terms of the 2005 Model Portfolio Agreement (set out in paragraph 63 above).
- Further the Risks Warning Schedule to this Agreement, although in similar terms to the 2009 Client Agreement, provided, additionally, a clear definition of each of the different risk categories for the portfolio in terms materially similar to those contained in the Questionnaire. In particular a "Balanced (Medium Risk)" provided that "the risk rating band of the portfolio is kept within a range of 3.5-6.5 (out of 10)."
- As an addendum to the 2013 IC Agreement, the "Portfolio Composition Schedule" recorded the "risk category" as "Balanced/Aggressive", the "objectives" as "Long Term Capital Growth" and the "Benchmark" as "APCIMS Balanced Portfolio Index".
- The findings of the s.166 Report form important background and include some relevant evidence. However the Report does not directly address the central issues relating to breach of mandate and stop losses specific to Mr Rocker's IC Portfolio.
- In July 2011, the FSA received a customer complaint concerning FCAM's selling practices and on 26 July 2011 the FSA carried out a supervision visit at FCAM's offices to review its systems and controls and compliance arrangements. Following that visit, on 3 October 2011, the FSA wrote to FCAM at some considerable length setting out its concerns, looking in particular at 6 customer files. The FSA's review had raised serious concerns around FCAM's selling practices, including in particular its approach to the assessment of risk, know your customer information and communication with clients, and the suitability of the Model Portfolio, particularly for a retail customer with a medium attitude to risk. As a result on 18 November 2011 the FSA issued, under s.166 FSMA, a "requirement notice" requiring FCAM to provide the FSA with a report by "a skilled person" – a Skilled Person's Report - to identify whether the firm's discretionary customers had been treated fairly and where this had not occurred, to calculate any necessary redress. The "skilled person" was to be required to make appropriate recommendations as regards FCAM's future compliance with its regulatory obligations. Kinetic Partners LLP ("Kinetic") was appointed by FCAM, with the FSA's approval, as the skilled person. Kinetic was required to produce an interim report and a final report. The interim report was issued on 27 January 2012 and the final report ("the s.166 Report") was issued on 20 March 2012.
- In the s.166 Report, Kinetic reviewed Model Portfolio accounts between August 2008 and July 2011. The IC Portfolio was not part of the main review. Mr Rocker's Model Portfolio was amongst the files reviewed, but not his IC Portfolio. Kinetic made clear that weaknesses identified were as a result of lack of understanding and awareness of the regulatory evolution and lack of regulatory knowledge. It accepted that FCAM acted in a way which it believed to be ethical. It concluded by making 55 recommendations for future action to be taken by FCAM, 15 of which were to be addressed within 3 months. In relation to suitability, the main weaknesses were lack of understanding, knowledge and awareness of current regulatory requirements and inadequate documentation to evidence sound systems and controls and suitability. Discussions about risk appetite took place but were not adequately evidenced on file. Clients were not provided with a selection of risk profiles from which to choose, nor with a sufficiently detailed definition of medium risk and there was no formal risk profiling tool to assess customer risk profile. The ATR document was not fit for purpose. As a result of the lack of evidence documenting risk assessment, Kinetic had not been able to assess suitability. 17 Model Portfolio files were reviewed, and Kinetic concluded that the files and documentation did not evidence compliance with COBS 9.2 (§§2.9, 5.262 to 5.267).
- As a result all clients were to be "re-papered" i.e. to re-evaluate their attitude to risk, to include an update of its ATR document, and to determine the ATR of each client; the suitability of the discretionary service could then be undertaken (recommendations 48 and 49).
- The s.166 Report described, and largely accepted, FCAM's approach to risk scoring, which had been provided to Kinetic. It accepted in principle the principle of net risk scoring. Only two cases showed gross risk scores in excess of 7. At §5.29 an initial concern about concentration on commodities was expressed, although on further investigation was downplayed. There was also criticism of the roles played by Mr Robson and Mr Selsby and in particular about the fact that they were not RDR compliant. Kinetic recommended that they had to completely cease advisory client relationships or be RDR compliant by the required deadline.
- As appears from the judgment of Nicol J in FCAM v Financial Ombudsman Service Limited [2017] EWHC 323 (Admin) (at §§8, 64-74) Kinetic produced, at FCAM's specific request, a further report dated 25 July 2012, being an extract of the s.166 Report.
- On 7 August 2012, Kinetic then produced a further report on the "re-papering" exercise carried out by FCAM pursuant to the s.166 Report recommendations and whether the services were suitable for the clients. Kinetic found that in the majority of the client files, in the light of subsequent ATR assessments and the collection of KYC information (based on the radically amended and improved client documentation), the investment services were suitable. Mr Rocker's two portfolios were reviewed (as regards the periods following the 2012 IC Agreement) and found to be satisfactory, both in terms of documentation and matching of customer and portfolio risk profile.
- Mr Rocker submits as follows:
- FCAM submits as follows:
- As to the content of the 2009 IC Agreement:
- As regards the investment strategy of the IC Portfolio, in my judgment it was to follow a "bear" strategy, namely to invest in short equity positions to take advantage of future falls in equity markets, which Mr Robson predicted would occur. It is clear from the evidence that this was the investment strategy which FCAM intended to pursue for the IC Portfolio. Further I am satisfied, and I find, that Mr Rocker agreed to that strategy being followed. Both his written and his oral evidence was to that effect: see witness statement paragraphs 16 and 23 and cross-examination (4/105, 4/176/8-12 and 5/8/6-18). In those circumstances the fact that it was not expressly put to him in cross-examination that he "agreed" to that strategy is irrelevant. Nor do I accept that such a strategy was necessarily in conflict with Mr Rocker's investment objectives. If Mr Robson's market assessment had turned out to be correct, then the strategy would or might have succeeded in above average investment growth and capital protection. Finally, as explained below, there was no requirement for that agreed strategy to be in writing or evidenced in writing. Given the entire background of the introduction of the new IC Portfolio and Mr Rocker's agreement to sign up to and invest in that Portfolio, it follows, and I find, that he agreed to that strategy.
- First, it is important to make a distinction between the "risk profile" of the client and the "risk profile" of the investments made. The former, which I refer to as "customer risk profile", is an assessment of the level of risk which the client is willing to accept with the investments which are made on his behalf. It is also at various times referred to as "attitude to risk and loss". The latter is an assessment of the degree of risk in the investments made, either individually, or over a whole portfolio of investment. I refer to the latter as "portfolio risk profile". In the course of the relevant events and argument in this case, this distinction has not always been clearly made.
- It is common ground that from June 2012 onwards, Mr Rocker's customer risk profile was "medium" or at the upper end of medium and that the ICP portfolio risk profile was "medium/high", or from January 2013, "balanced/aggressive". What is in issue is, in particular, the ICP portfolio risk profile between May 2009 and June 2012. Mr Rocker contends that that risk profile was "medium"; FCAM contends that it was "medium, but flexible". The position concerning customer risk profile is less controversial; it is agreed that in this period, Mr Rocker's customer risk profile was "medium", albeit FCAM puts a gloss on that by describing it as "upper end of medium".
- I consider, first, Mr Rocker's contention that FCAM is precluded from alleging that the portfolio risk profile was other than "medium". Secondly, I consider, in any event, what was agreed.
- The original Particulars of Claim addressed the issue of "risk" in two particular paragraphs. At §7(ii), it is alleged that for the IC Portfolio: "Risk category from May 2009 to June 2012: "Medium". Risk category from June 2012 to March 2014: "Medium/High"." Then at §13, Mr Rocker pleaded "in the Client Agreement… it is understood that the Claimant described the risk he wished to accept as "medium"."
- In its original Defence, FCAM set out, first, its general case, and subsequently responded to specific paragraphs in the Particulars of Claim. In the first, general, part, it pleaded:
- Then, in the part of the Defence which responds to the Particulars of Claim, FCAM pleaded:
- Shortly before the trial, FCAM applied to amend its Defence, most particularly in relation to its case as to the correct level of portfolio risk profile. In summary, FCAM sought to change its pleas (at §§5.2, 13.1, 34.3) from accepting that, in the initial period, the portfolio risk profile was "medium" to contending that, in that period, the portfolio risk profile was "intended from the outset to be flexible such that the risk profile would fluctuate between medium and high" (§§5.2, 13.1, 34.3 draft Amended Defence). Ms John accepted in closing argument that the basis of this application was the content of the 9 March 2009 file note referring to a risk profile of "medium/high". Further, FCAM sought to amend §14.12 in relation to what was said in June 2012 when the risk profile was changed and sought to delete §10. §40 of the Defence remained as in the original.
- The application came before Deputy Master Leslie on 2 November 2016. Mr Rocker contended that in the original Defence, FCAM had admitted that the risk profile was "medium" as alleged by Mr Rocker in the Particulars of Claim, and that the application to amend was an application to withdraw an admission. FCAM did not accept that the initial Defence constituted an admission; in any event permission to amend or withdraw the admission should be granted.
- Deputy Master Leslie, by order dated 4 November 2016, dismissed FCAM's application. In his ruling dated 2 November 2016, he observed that in the original Defence there was an inconsistency between §5.2 and §40. He concluded that what had been pleaded in §5.2 was an admission of the allegation of "medium risk" and thus (at §8 of his ruling) that the amendment was not simply clarification, but rather it sought to remove "an apparent contradiction" on the face of the original Defence. He then proceeded to refuse permission to withdraw the admission on a number of grounds, in particular on the basis that the 9 March file note had been available to FCAM for over one year. Deputy Master Leslie himself refused FCAM's application for permission to appeal against his order. That application was not renewed to the High Court.
- At the trial before me, Mr Rocker submits that the effect of this order and decision is that FCAM is precluded from contending that the portfolio risk profile of the IC Portfolio, in the initial period up to June 2012, is anything other than "medium" and that the decision to refuse the amendment to §5.2 effectively overrides §40.
- FCAM, by contrast, submits that, whilst it accepts that it is precluded, by the decision, from contending that the portfolio risk profile was "medium/high", nevertheless, by dint of §40 of the Defence, as it stands, it remains free to contend that that risk profile was "medium but flexible". Those paragraphs in the Defence which contend that the portfolio risk was "medium" have to be construed in the light of the reference to flexibility in §40.
- In my judgment, the effect of the decision and order of Deputy Master Leslie is to preclude FCAM from asserting that the portfolio risk profile of the IC Portfolio, in the initial period up to June 2012, was anything other than "medium". I do not accept that the reference to "flexible" in §40 of the original Defence can bear the meaning "medium but flexible" for the following reasons. First, the application made by FCAM was put on the basis that the change from "medium" to "medium/high" was merely a clarification. Secondly the amendment sought to be made was not simply expressed in terms of changing the words "medium" to the words "medium/high", but rather was expressly based on the concept of "flexibility" (see the wording of the draft amendment set out in paragraph 115 above) and sought to introduce the contention that the risk profile was "flexible". In making that application it is clear that FCAM intended the word "flexible" to mean a risk profile of "between medium and high" i.e. "medium/high". So, in the amendments sought, but disallowed, FCAM was contending that the word "flexible" meant "medium/high" and, presumably, had those amendments been allowed then it would have been said that §40 meant "flexible" in that sense i.e. as between medium and high.
- However now, those amendments having been disallowed, FCAM contends, as it must, that the word "flexible" in §40 means "flexible" within a "medium" risk profile. That is a different meaning. The intention of the amendments sought was to bring the pleading in to line with §40.
- Further, there is the difficulty that the nub of the factual case made by FCAM now to support its contention that the portfolio risk profile was "medium but flexible" is based on the 9 March file note and what is said there about risk. However that file note does not refer to "medium but flexible" but refers expressly to "medium/high", the very allegation which FCAM is, by virtue of the unappealed ruling of Deputy Master Leslie, precluded from making (as properly and fairly accepted by Ms John in argument).
- Indeed the notion of "medium but flexible" is nowhere referred to in any pleading nor, as a recognised risk category or type, in any contemporaneous document and in my judgment has been introduced by FCAM in order to get round the consequences of the Master's refusal of the application to amend.
- The background to this issue is the fact that, at the time of the discussions for, and conclusion of, the 2009 IC Agreement, and effectively contrary to the provisions of clause 2.3 of the Client Agreement itself, FCAM did not undertake any formal or semi-formal assessment of Mr Rocker's attitude to risk nor any formal or semi-formal notification of the risk profile of the new IC Portfolio. This is to be contrasted with the comprehensive and formal steps taken in 2012 (following the s.166 Report) in relation to both customer risk profile and portfolio risk profile. The further background is that, as at that time, the only formal or semi-formal assessment of attitude to risk that had been undertaken was the one undertaken in relation to the Model Portfolio in 2005 in which clearly Mr Rocker indicated that his customer risk profile was "medium" risk. Whilst it is not possible to read across from the Model Portfolio to the new IC Portfolio and automatically apply the risk profiles of the former to the latter, in my judgment, if the new IC Portfolio and Mr Rocker's attitude to risk in relation to that portfolio were to be different, then that required spelling out clearly and required Mr Rocker's express agreement. To do so would be in keeping with the requirements imposed by COBS 9.2.1(2), 9.2.2(2) and 9.2.3 (see paragraph 272 below). I find, there was no such express agreement of any such different risk profiles, even though I accept that it was known to Mr Rocker that the IC Portfolio was of a different nature.
- Subsequently, and in the context of the Kinetic investigations, in an email of 11 January 2012, Mr Selsby instructed others within FCAM that it was "imperative when clients move away from model that any increase in the risk parameters is properly recorded, documented and above all agreed with the client". In cross-examination, he accepted that this applied where an existing client took out a new portfolio (7/16/9-12) (such as when Mr Rocker took out his IC Portfolio). He believed that in the case of Mr Rocker, that this was done by the 9 March 2009 file note, but accepted that there was no written agreement in that regard nor any document recording Mr Rocker's agreement to a change in risk in 2009 (7/17/1 and 12-15).
- Given the significance of documenting risk profile for the purposes of the Client Agreement, and Mr Selsby's evidence, it is notable that in this case there was no such documented agreement to risk profile.
- Mr Rocker in his witness evidence stated that "I understand and accept that my attitude to risk at the time that agreement was described as 'medium' by the Defendant". He had not filled out any further attitude to risk questionnaire since 2005 and he did not think that his attitude to risk had changed in respect of the IC Portfolio. In re-examination (5/200) he confirmed that, after the 2005 ATR Document and by May 2009, FCAM had never provided him with a new version of the document to sign, that it had not asked him whether he would like to reconsider whether he regarded himself as a medium risk investor, and he himself had never told FCAM that he no longer felt that he was a medium risk investor.
- As to whether there was such an agreement to a change, FCAM relies on a number of strands of evidence.
- As regards the internal memo of 7 January 2009 from Mr Marsh to Mr Robson, FCAM suggests that this is evidence of an oral agreement (made between Mr Marsh and Mr Rocker) to support its case both as to customer risk profile and the portfolio risk profile. Whilst the reference to Mr Rocker being "willing" to take a higher degree of risk, appears to record something which was discussed between Mr Marsh and Mr Rocker, I do not accept that this is evidence of an agreement by Mr Rocker to increase risk profiles nor, in particular, to an increase or modification of his portfolio risk profile to "medium but flexible". First, there is no direct evidence from any witness that there was any such discussion on or before 7 January 2009 to that effect. The memo itself does not refer to any conversation. The writer of the memo, Mr Marsh, has not given any evidence at all. Mr Robson in his written evidence does not refer to this memo at all. Mr Selsby merely cites it, without comment. Secondly, and in any event, it certainly does not record any agreement to an increased portfolio risk profile. Further, in view of what FCAM contends is meant by "medium but flexible", in my judgment, this memo does not establish that at that time Mr Rocker had an understanding of what is now said that the term denotes. Similarly a much earlier internal note from April 2006 in which Mr Marsh recorded Mr Rocker being willing to put further funds under management "on a much more speculative basis" is not sufficient to establish, some three years later an agreement for a "medium but flexible" portfolio risk profile, even if, contrary to Mr Rocker's evidence (5/9/16-17), he had in fact said this.
- As regards the meeting on 9 March 2009 between Mr Rocker, Mr Robson and Mr Marsh, FCAM's case is that at that meeting there was an oral agreement that the customer risk profile was to be "upper end of medium" and that the portfolio risk profile was to be "medium but flexible", and that that agreement is clearly evidenced by the terms of Mr Robson's file note of the same date.
- Mr Rocker's evidence in chief was that he did not recall any discussion about his risk appetite at that meeting, a position he maintained in cross-examination when the terms of the file note were put to him. In an important passage in his cross-examination, he appeared to say, ambiguously, both that he did not recall such a discussion and that he did not believe that there was such a discussion (5/17/6-5/18/8). When asked by me to clarify his position, he said he believed that risk had not been discussed and that the file note must have been an inaccurate record of what was discussed (5/229/11-24). I have already commented on this evidence (see paragraph 45 above). Whilst Mr Rocker's oral evidence on this file note was not entirely satisfactory, the following considerations arise.
- First, what the file note itself records is a view that, for the IC Portfolio, Mr Rocker's own customer risk profile was to be "medium/high" and that the portfolio risk profile was to be "flexible but likely to be medium/high". Thus, on its own terms, it does not support the case now made by FCAM. As regards customer risk profile, the file note contradicts its case that Mr Rocker's customer risk profile was "medium" albeit at "the upper end". Secondly, it contradicts the case that portfolio risk profile was "medium but flexible" as that term is now explained. Rather, on its own terms, it supports a claim that it was to be "medium/high"; a claim now disavowed by FCAM, and indeed one which, it is accepted, it is precluded from putting forward. Indeed, given that the foundation for the disallowed amendment was this file note, it is hard to see how FCAM can now rely upon it as establishing a different case as to risk profile.
- Secondly, Mr Robson's evidence in his witness statements on this meeting and the file note is not detailed and, in my judgment, does not go so far as to say what was actually discussed and agreed with Mr Rocker at the meeting. He states merely that "as time passed and Mr Rocker's objectives and knowledge adapted, so too did his attitude to risk". He then merely cross-refers to the file note and its contents, without further comment. He does not say that at the meeting on 9 March 2009 there was discussion of Mr Rocker's attitude to risk, let alone that there was positive agreement that it should be raised from "medium" to "medium/high". Mr Selsby's evidence that the file note was consistent with his understanding of Mr Rocker's profile from his discussions with Mr Robson does not itself take matters further as to what was discussed or agreed with Mr Rocker at the meeting, being equally consistent with an internally held view within FCAM. Mr Selbsy accepted in cross-examination (6/151-152) that he believed, when the matter came to light and he looked at the file, that the customer and portfolio risk profile was "medium".
- Thirdly, neither Mr Marsh's manuscript note of the meeting made on 9 March nor his letter to Mr Rocker of the following day made any reference to discussion of customer or portfolio risk profile, although other points made in Mr Robson's file note are to be found in one or both of those two documents. The letter makes no reference to risk profiles, let alone to the raising of Mr Rocker's own risk profile or that of the Portfolio to a level greater than "medium". Further, I draw, from the absence, without explanation, of Mr Marsh as a witness, the inference that his evidence as to this meeting would not have assisted FCAM. This further weakens FCAM's case on this issue: see Wisniewski, supra, principle (2).
- Fourthly, it is far from obvious what is meant by "medium but flexible". If such a risk profile permits the portfolio risk to stray outside the appropriate profile score range, it does not establish the parameters for such permitted "straying" either in terms of duration in time or amount. Whilst the meaning to be attached to that term has now been spelt out by Ms John in argument, there is no evidence that at the time that the 2009 IC Agreement was concluded such an approach to portfolio risk was explained to, let alone agreed by, Mr Rocker. Absent such explanation or understanding, I am not able to find that there was agreement that the portfolio risk profile was "medium but flexible" as now contended for.
- In these circumstances, I am not satisfied that at the meeting there was clear discussion of Mr Rocker's customer risk profile or the portfolio risk profile. Even if there was some such discussion, I find that at that meeting there was no express agreement on the part of Mr Rocker to the risk profiles now alleged by FCAM, and in particular that the portfolio risk profile was to be "medium but flexible".
- As regards subsequent events, and in particular the assessments undertaken in June 2012, the detailed FinaMetrica Profile and in the Questionnaire, Mr Rocker's customer risk profile was assessed as "medium", albeit at the upper end of medium. As to this, first, even if this supports the contention that as at May 2009 his customer risk profile could be assessed as "upper end" of medium, that does not, of itself, establish a portfolio risk profile of "medium but flexible". Secondly, the customer risk profile assessment in 2012 further undermines the weight to be attached to the 9 March 2009 file note (which in terms contradicts the FinaMetrica assessment), as evidence of agreement in 2009 to a different and higher customer risk profile.
- Further I do not accept that the fact, following the detailed assessments then undertaken with Mr Rocker, that in June 2012 the portfolio risk profile was agreed to be "medium/high" is evidence of what had been agreed in respect of the prior period. As regards the words "DR agreed to maintain" in the internal file note of 11 June 2012 (set out in paragraph 90 above), I do not accept that, in context, those words necessarily indicate that Mr Rocker was there agreeing that the portfolio risk had previously been "high" and that he was happy for it to be continued at that level. The words of the note are equally consistent with indicating that Mr Rocker was happy to keep or maintain his investment in the IC Portfolio even though, going forward, it would be likely to be in the high-risk range. Indeed the former construction of those words is at odds with FCAM's case that in the prior period the portfolio risk profile had been "medium but flexible" (and not high or medium/high). Finally, the terms of Mr Robson's letter of 15 June 2012 are consistent with the 2012 risk assessment being a fresh and different assessment both of customer risk and portfolio risk.
- Nor do I accept that the subsequent operation of the IC Portfolio as said to be evidenced by internal notes and correspondence from 2009 onwards supports the contention that the agreed portfolio risk profile was "medium but flexible" (so as to permit straying beyond "medium"). First, absent evidence of a contractually binding variation in the 2009 IC Agreement, subsequent conduct cannot be relied upon as evidence of what was agreed in May 2009. Secondly, and in any event, the documents specifically relied upon (dating from 12 August 2010, 14 December 2011, 22 February 2012 and 17 April 2012) do not evidence overall agreement to exceed a portfolio risk profile of "medium", rather than evidencing, in particular instances, an increase in the level of risk more generally within the medium risk band. As regards the reference to "high risk" in an internal FCAM file note of 12 August 2010, this was not referred to in the letter sent to Mr Rocker on the following day. In any event, that one sole internal reference to high risk, is not sufficient to support FCAM's case as to what was agreed in May 2009.
- As regards "upper end of medium" for customer risk profile, in my judgment FCAM has not been able to point to any evidence which directly or expressly supports that. The 9 March file note in terms refers to a "medium/high" customer risk profile, but of course that is not the case which FCAM is making nor is permitted to make. The 9 March file note does not support "upper end of medium". Absent a further survey or assessment, in my judgment customer risk profile remained "medium".
- More importantly, as regards portfolio risk profile, it may be that, in the period up to June 2012, FCAM internally regarded the portfolio risk profile of Mr Rocker's IC Portfolio as being "medium but flexible", but in my judgment, there is no clear evidence of positive agreement by Mr Rocker to this being the case.
- Accordingly, since it is accepted by FCAM that both the customer risk profile and the portfolio risk profile were in the "medium" category, and I find that there was no express agreement to "medium but flexible", it then follows that both risk profiles were "medium". Whilst I have concluded that the 2005 ATR Document is not a contractual document as envisaged by, and for the purposes, of clause 2.3 of the Client Agreement, in my judgment, the assessment there made remained essentially on foot, absent any expressly agreed modification or any further proper risk assessment.
- In determining whether FCAM acted in breach of the IC Portfolio risk mandate, the following issues arise:
- The question is whether the actual overall portfolio risk for Mr Rocker's IC Portfolio exceeded the agreed portfolio risk profile, from time to time. The issue has been based on ascribing numerical values to the agreed risk profile and to the actual risk inherent in the IC Portfolio – the latter is referred to as "risk scoring". It is common ground that from June 2012 onward there was no such breach of mandate: in that period, the agreed risk profile increased to medium/high and in fact the overall portfolio risk reduced. The issue is thus confined to the period before June 2012, when, as I have found, the contractual IC Portfolio risk profile was "medium".
- In the course of evidence, it became clear that it is agreed that ascribing numerical values to the risk involved in particular assets, and to a portfolio as a whole, is not a precise science and that there can be reasonable divergence of views. So long as FCAM's risk scores were within the reasonable range of such views, then those scores were appropriate.
- The issue has been largely determined by reference to the risk scoring of Mr Rocker's IC Portfolio over time put forward by FCAM in a document annexed to Mr Goodyer's report at Appendix 42. Appendix 42 is, in turn, based upon an underlying risk scoring methodology, in a document annexed to Mr Goodyer's report at Appendix 41. FCAM relies upon Appendix 42 to show that the relevant risk mandate has not been breached. In response, Mr Rocker takes issue with the methodology and calculations underlying Appendix 42 and has prepared different calculations, albeit based upon those in Appendix 42. Dr Walford has not carried out his own risk scoring of the individual assets nor of the overall portfolio.
- Appendices 41 and 42 were prepared specifically for the trial. Appendix 42 was prepared by FCAM (and not Mr Goodyer). There were two versions of Appendix 42. In the second and final version, equities were scored at 6 (rather than 5). In his report, Mr Goodyer commented upon FCAM's work in Appendix 42 and also did his own calculations, at six monthly intervals, as a cross-check. As regards the preparation of Appendix 41, this was said to have been prepared by Mr Selsby, based on an earlier document prepared by Mr Miller of FCAM - the 2013 Miller document.
- At the end of January 2013, John Miller produced the 2013 Miller document: a two page document setting out FCAM's risk scoring methodology. This was prepared in response to a request the day before from Mr Selsby to prepare a document "[which] unpacks the methodology/logic behind the risk score template, to include comment on the "adjustment" and volatility of the assets classes". Two versions of that document were prepared. The second version contained some greater and important detail: a paragraph was introduced explaining in general terms the principle of netting assets which were a direct hedge.
- Appendix 41 itself stated, and Mr Selsby confirmed that it recorded a methodology which FCAM had applied since 2011, with some modifications. In the light of further evidence which emerged toward the end of the trial, I am satisfied that Appendix 41 was prepared between September and October 2016, that it was initially prepared by FCAM (in particular Mr Selsby), and that Mr Goodyer provided some substantive, and more than trivial, input into the final version. Appendix 41 did not exist at the time of, and could not have been used to score contemporaneously, Mr Rocker's IC Portfolio; however it does reflect, to a considerable extent, what is in the 2013 Miller document. Mr Selsby's further evidence was that this methodology, including the methodology for net risk scoring, was in fact applied, as far back as 2006, through a risk scoring template on an excel programme. Dr Walford in his second report produced two graphs, which illustrate, over time, Mr Rocker's IC Portfolio risk score, on different bases, set against a mandate limit of 6.5.
- As regards the burden of proof, FCAM submits that the burden is on Mr Rocker to show that FCAM and Mr Goodyer's analysis is wrong. Mr Rocker submits that FCAM must demonstrate that its risk scoring is correct, including net risk scoring. In my judgment, overall the burden of proving breach of mandate lies upon Mr Rocker. Further to the extent that FCAM adduces evidence to rebut breach of mandate, then there is an evidential burden upon Mr Rocker to show that FCAM's approach and calculations are wrong.
- Regardless of precise numerical range for a medium risk profile, and regardless of flexing, it is clear that, if there is no reduction for netting, and even without addition for diversification, the portfolio risk score for Mr Rocker's IC Portfolio exceeded the top of the medium risk band numerical score and there was a breach of mandate. Thus the issue of "netting" is of particular significance.
- Mr Rocker's case is straightforward: the permitted range of scores for a medium risk portfolio is 3.5 to 6.5. If the risk score of a particular portfolio exceeds 6.5 the investment manager is acting in breach of mandate.
- FCAM's case is less straightforward. It submits that the permitted range is 3.5 to 6.5 with a tolerance of + or – 0.5. It is not clear whether this tolerance applies at all times, thereby effectively extending the permissible range to 3 to 7, such there is a breach of mandate only if the risk score exceeds 7, or, on the other hand, exceeding 6.5 by the tolerance is permitted only for short periods of time. Further, flexibility is allowed, and there is no breach of mandate even where the relevant upper limit is exceeded, as long as this is for limited periods of time. It is not entirely clear whether, in this context, the upper limit is said to be 6.5 or 7. However I will assume that this "flexing" point is additional to the tolerance and so the upper limit is to be taken as 7 and "flexing" above 7 is permitted. Further, it appears that FCAM's case in closing is that this "flexing" tolerance applies even where, as I have found, the portfolio risk profile is "medium" and not, as argued, "medium but flexible".
- Starting with the range for a medium risk portfolio, the evidence points to a maximum range of 3.5 to 6.5. First and most significantly, FCAM's own documents provided by FCAM to Mr Rocker expressly state this range: see the Questionnaire and FCAM's Risks Warning Schedule to the 2013 IC Agreement. Dr Walford supports this view. Further, other materials (the s.166 Report, the 2013 Miller document, Appendix 41 itself and Mr Goodyer's first report) support this range, as being the starting point before any suggested additional "tolerance". I note too that in its Amended Defence, FCAM admitted that this was the correct range for medium risk.
- It is said that the s.166 Report supports the conclusion that the basic range is 3 to 7. That report stated, in March 2012, that the range is 4 to 6 but "with a single digit deviation either side also falling within medium but lying on the boundary". This approach is also that set out in the revised (but not the original) version of the 2013 Miller document: "the firm permits one digit deviation either side of these ranges at the managers' discretion dependent upon the economic environment and market conditions". Noting the similarity of language, it seems very possible that the s.166 Report was based on information suggested by FCAM. In any event, in my judgment, this discretionary deviation goes to the issue of whether there should be a tolerance or flexing and not to the question of the basic core score range.
- I therefore conclude that the permitted basic range for a medium risk portfolio was scores of 3.5 to 6.5.
- I turn then to tolerance and flexibility, which are said by FCAM to be two different, cumulative, concepts.
- Mr Goodyer's evidence was contradictory. In his first report, he stated, first, that there should be allowance of + or – 0.5 "for short durations" but at the same time said that, provided the profile did not exceed 7, FCAM did not breach the agreed level of risk. Thus he was unclear as to whether the 0.5 tolerance was across the board or a "short time" flexing tolerance. Then, at §12.11 he seemed to suggest that going above 7 was also permitted for "short periods". Again, at §13.05 (and §13.15 to similar effect) he suggested, first, that, effectively there was a 0.5 tolerance and an ability to flex above that tolerance for less than a sustained period i.e up to 3 months, but then he seemed to revert to the short term fluctuations being covered by the 0.5 tolerance. At §13.07, he referred to being in breach if outside the risk scoring band for a sustained period. Thus his evidence seemed to be that (i) 6.5 with short term fluctuations up to 7 is within mandate and (ii) 7, with excesses over 7 which are not sustained, is within mandate. At §4.41 of his second report, he stated that "flexibility" is acceptable "providing the breach was small and the period short". In cross-examination, he said, first (at 9/127 to 131), that, 3.5 to 6.5 was the range, but flexibility allowed short term periods outside that, and up to 7. He accepted that the aim should be to operate within the risk band, but then he said that there was flexibility up to 7. As to the source of the tolerance, whilst accepting that there was nothing in the 2009 IC Agreement regarding a tolerance of 0.5, he then referred to the 9 March file note, as justifying such a tolerance i.e, that a medium but flexible agreed profile would justify an extension to 7. He then admitted that he had obtained the figure of 0.5 tolerance directly from FCAM itself. However in re-examination he considered that the gap between 6.5 (the top of medium) and 7 (the bottom of aggressive) in the Questionnaire would justify a tolerance of 0.5. As regards the periods for which "flexing" was permissible, in his first report Mr Goodyer identified the period as being 3 months, then in the Joint Memorandum (§17.3) he said the period was up to 4 to 6 weeks (without the client's agreement) and then in cross-examination he identified the periods as "only for very short periods" (9/127/9-10). Essentially Mr Goodyer confused the notion of short term flexing outside the mandate range and increasing the mandate range up to 7 so as to allow for short term flexing.
- I note further that at Appendix 41 where for medium, the tolerance takes the top of the range up to 7, FCAM itself states that "the tolerance is permitted only in the short term and is to allow for fluctuations within portfolios".
- First, in my judgment, there is no justification for allowing both a 0.5 tolerance so as to increase the range and flexing above that increased range. As regards the latter, Mr Goodyer's evidence was so confused as to be unreliable. In particular, his evidence as to what constitutes a "short period" was inconsistent and not credible. Furthermore, given that I have found that the portfolio risk profile was "medium" and not "medium but flexible", it would undermine that conclusion, if it were nevertheless permissible to "flex" above the correct range for unspecified periods of time.
- Nor am I satisfied that a tolerance of 0.5 should be allowed. First, as accepted in cross-examination, if allowed in all circumstances it would have the effect of increasing the band to a de facto 3 to 7 across the board. In that event, the tolerance is no longer a measure to allow for short term fluctuations (as stated by FCAM itself in Appendix 41 and in the s.166 Report). Mr Goodyer's evidence was not consistently to that effect. Further, Dr Walford's evidence (8/168/17-18; 8/171/1-6) was that he had not come across the idea of a deviation points either side of a numerical range. It was the responsibility of the investment manager to stay within range and to that end the manager should be doing frequent assessments. Secondly, whilst in the s.166 Report, Kinetic accepts that there may be said to be tolerance, the source of that view is an assertion from FCAM itself. There is no independent support for the tolerance. Thirdly, if alternatively the tolerance is to be permitted only for short periods, FCAM and Mr Goodyer have not been able to demonstrate what that permissible short period should be – be it three months, 4 to 6 weeks or even shorter. The evidence as to the meaning of "short term" is too uncertain to allow 0.5 tolerance on this basis. Finally, whilst the gap in the later score ranges for "medium" and "aggressive" (see paragraph 88 above), might be seen as some support for a tolerance, that point is not strong on the facts here. Mr Rocker's subsequent customer risk profile was 57, and not in the crossover area of 60-65, where there might be an argument for such a tolerance. Assuming this reflects the position before June 2012, this makes the case for a tolerance in Mr Rocker's case even less compelling.
- Finally, FCAM further submits that there is no breach of mandate where it occurred with the express knowledge and consent of Mr Rocker and that in certain periods where the risk score exceeded that permitted by the mandate, this had been done with the express knowledge and consent of Mr Rocker, relying on four particular examples. I do not agree. As regards a file note of 12 August 2010 referring to high risk, the letter the next day makes no mention of his. As regards an email of 14 December 2011, whilst Mr Robson stated that he planned to raise the level of risk, nothing is said about the levels to, and from, which risk was to be raised and there was no mention of breaching the medium risk band. Later letters are to the same effect. Even if, from time to time, Mr Rocker knew that in general terms risk would be raised, he did not know what the overall risk score for his IC Portfolio was and whether any particular investment would take the risk outside that for a medium portfolio. Indeed it appears that until June 2012, Mr Rocker was unaware of numerical scoring for a medium risk portfolio or of his IC Portfolio and there is no evidence that indeed at times before 2012 Mr Robson himself was aware of the relevant numerical scores.
- One issue was whether, and if so, in what way FCAM carried out, contemporaneously (ie between 2009 and 2014), risk scoring and/or risk monitoring of Mr Rocker's IC Portfolio. This issue was hotly contested and Dr Walford and Mr Coppel made much of an allegation that it had not been carried out at the time. The evidence on the issue was confused and far from satisfactory: for example, Mr Goodyer in his first report effectively stated that FCAM had regularly carried out detailed risk scoring at the time. On the other hand, Mr Selsby in his witness statement expressly suggested that Mr Robson did not carry out risk scoring of Mr Rocker's IC Portfolio on a regular basis at the time, whilst subsequently suggesting in oral evidence that it had been done on an excel template and spreadsheets, which were no longer retained. There is evidence that risk scoring was carried out earlier in an email from Mr Selsby to Chris Salacinski dated 11 January 2012, said to attach a spreadsheet of risk scores for all non-Model accounts and indicating that it was imperative for non-model risk to be properly recorded, documented and agreed with the client. This occurred during the period of the s.166 investigation. An extract from the spreadsheet disclosed appeared to show Mr Rocker's IC Portfolio with a gross risk score of 6.1. In re-examination on this document, Mr Selsby gave contradictory evidence as to when mathematical scoring was introduced (7/67-69). Dr Walford in his second report made strong forensic points. Ms John accepted in closing that there was no record she could rely upon to show that risk scoring had been done by Mr Robson at the time.
- Whilst a detailed written risk scoring methodology does not appear to have been produced until, at the earliest, the 2013 Miller document, the interim s.166 Report dated January 2012 contains very similar essential information as to FCAM's approach to risk scoring, even if only in relation to the Model Portfolio and even makes reference to the net scoring of long and short equity positions. Certainly Appendix 41 and its application in Appendix 42 (the risk scoring of Mr Rocker's own IC Portfolio) did not exist at the time and were prepared specifically for this trial. FCAM's evidence on what if anything was done contemporaneously was opaque and unsatisfactory and I do not accept without more that Mr Rocker's IC Portfolio was regularly risk scored during the course of its operation.
- However in my judgment, even if risk scoring was not carried out at the time, that makes no difference to the outcome on this issue. The claim for breach of mandate is not based on a failure by FCAM to take care not to breach mandate or to carry out risk scoring properly at the time. Rather the claim is one of strict liability. The question is whether, on a reasonable risk score for the IC Portfolio (reasonably undertaken by FCAM) the overall score for the portfolio did - or did not - exceed the agreed portfolio risk profile, even if the risk scoring has taken place later and retrospectively.
- Whether risk scoring had been carried out at the time might have been relevant if the standard for breach of mandate was one of negligence. For example, if the risk scoring, now carried out, showed that there was a breach of mandate, but reasonable scoring carried out contemporaneously showed that there was no breach at the time, then on a negligence standard, FCAM might well have had a defence.
- Accordingly it is not necessary, in my judgment, to reach any final conclusion on the extent to which during the period of the operation of Mr Rocker's IC Portfolio, FCAM carried out risk scoring of his IC Portfolio.
- FCAM scored risk on different classes of asset on a scale of 1 to 10. As regards the risk scores for individual assets given by FCAM, there was not much in dispute between the parties. Each of Mr Goodyer and Dr Walford carried out their own assessment of these scores and each agreed that risk scoring was subjective and that there was room for reasonable divergence. Whilst Mr Goodyer scored some risks differently from FCAM and from Dr Walford, he broadly considered that FCAM's scoring was acceptable. Kinetic, too, took no issue with FCAM's approach to risk scoring for individual assets: §§5.9 to 5.12 s.166 Report.
- In cross-examination of Dr Walford, FCAM produced a table showing the difference between FCAM's individual asset scores and Dr Walford's. Overall the differences were not great, and indeed there were more instances where FCAM's score was higher than that of Dr Walford than vice-versa. Out of 53 assets, in 37 cases, the score was either the same or FCAM's score was higher. In the other 16 cases, where Dr Walford's scores were higher, in 8 of them, the difference in score was 1 or less. Further, 9 of those cases made up less than 5% of the portfolio and in only two of the remaining 7 was the difference in score more than 0.5. Dr Walford accepted that there was a very small number of figures which were outside the range for reasonable disagreement (8/61/12).
- As to specific differences identified by Dr Walford:
- Accordingly taking all the foregoing into account and the fact that Mr Rocker did not, overall, substantially dispute the position, I find that FCAM's risk scoring of individual assets was appropriate and within the range of reasonable divergence. I therefore adopt those scores.
- Two adjustments to the gross portfolio risk score have been advanced. Mr Rocker's case is that the score should be increased by + 1 to reflect the fact that the make up of the assets in the IC Portfolio was not sufficiently diversified ("diversification"). FCAM's case is that the gross score can properly be reduced where the Portfolio contained assets, the risk in which can be offset against each other (i.e. netting).
- Mr Rocker's case is that a portfolio with no, or negligible, diversification will have its overall risk level increased to reflect that fact. In his first report, Dr Walford took the view that Mr Rocker's IC Portfolio was not sufficiently diversified to ensure that different countries, different sectors and different holdings were covered and thus added, across the board, (in Appendix 6) a figure of + 1 to each score he had calculated (in Appendix 7), up until 4 June 2013. The principle of diversification is that it ensures that a portfolio is not exposed to a single investment stock, idea or theme. For most of the initial period, there was exposure only to commodities (raw material, precious metals and commodities) and bear funds. Even if there was diversity within one class of assets, there was significant exposure to the class, (bear funds) or to the sector (commodities). The + 1 was removed in June 2013 when general equity funds were added to Mr Rocker's IC Portfolio.
- Mr Goodyer accepted that the IC Portfolio, because of the contrarian approach involving bear funds, did have limited diversification, see his first report, §9.10 and Joint Memorandum §31. However he did not agree to add + 1 and took a different view as to the extent of the limits on diversification.
- FCAM's case is that Dr Walford failed to take into account the nature of certain assets within the IC Portfolio which provided diversification nor did he perform any underlying analysis to support his contention that there was any impermissible over-concentration of risk in a particular asset class or sector or correlated assets. In the course of cross-examination and argument, FCAM produced two coloured graphs showing a pictorial representation of diversification within the IC Portfolio, on the asset classification both of Dr Walford and FCAM.
- I am not persuaded by Dr Walford's reasoning to support his adding + 1 to the risk score for lack of diversification.
- First, his oral evidence on this issue was not convincing. At more than one place in the course of his cross-examination on this issue, he sought to make the point that, even without lack of diversification, the ultimate quantum of loss was greater, thereby giving the impression that he was seeking to avoid addressing the underlying justification for the + 1 for diversification.
- Secondly, whilst at any one time there were not a large number of individual assets in Mr Rocker's IC Portfolio, many of the assets were exchange traded funds (ETFs) of market indices within which there was significant diversification: for example the MSCI Japan, which combined enhanced diversification as to company, sector and geography. At §5.04 of his second report, Mr Goodyer listed eight further examples of multi-asset funds, as examples of diversification within assets. Very significantly, in cross-examination Dr Walford accepted that MSCI Japan was "sector diverse" and, on the facts, also "country diverse" (8/110-111 and 8/107) and further that if the types of instrument listed at §5.04 of Mr Goodyer's second report were present, there would not be any lack of diversity (8/118/22 to 8/119/5). In short, he accepted that these equity index products within the IC Portfolio did include diversification.
- Thirdly, as regards concentration in bear funds (and diversification within bear funds), Mr Coppel argued, first, that this could not assist FCAM on diversification because the bear strategy had not been agreed. I have already rejected that contention: see paragraph 108 above. Secondly, Dr Walford accepted that, in his analysis, he had not taken account of diversification within bear funds, because those assets involved a departure from "the central expectation of a fund of this sort". When explored a little further, it became clear that, in this regard, Dr Walford was using a different and separate justification for his addition of + 1 to the risk scores. That justification was based on his view of the role to be played by the APCIMS benchmark (i.e. that the IC Portfolio should have had assets to match the asset allocation within APCIMS): see second report §7.31 and cross-examination at 8/114/22 to 8/116/25. He accepted that this different and new justification for his + 1 was an afterthought. Subsequently he accepted that some of the bear funds were based on the FTSE and that bear funds have a make up of different sectors. Ultimately in answer to a question from me, Dr Walford accepted that, leaving to one side any issue about asset allocation under the APCIMS benchmark, a bear fund with underlying investments in every industrial sector and across the world would be diversified.
- Fourthly, Dr Walford carried out very little detailed analysis of diversification. His claim that lack of diversification was shown by insufficient lack of correlation between assets was not supported by any analysis. Further, in cross-examination, he accepted that he had just added in a single + 1 factor. (8/122/5). For example, he made no distinction between different time periods, which were illustrated by FCAM's coloured graphs. Whilst he subsequently asserted that he had done the analysis, this was never explained (8/139-142).
- By contrast, FCAM's coloured graphs, both on their face and in the light of cross-examination of Dr Walford, do demonstrate certain diversification within Mr Rocker's IC Portfolio over time, both generally and once likely diversification within bear funds is taken into account. Further Kinetic did not consider it necessary to make such an addition: see s.166 Report §§5.13 and 5.14. Further, at §5.29, Kinetic was satisfied that, on analysis, the claim to overexposure to commodities was not borne out - when correlation analysis was carried out, it showed that the asset was more closely correlated to the equity index than to the underlying commodity and thus the concentration risk attributable to commodities was less than it was originally thought to be. Whilst that conclusion was based on evidence and material submitted to Kinetic by FCAM itself, there is no evidence to contradict it.
- In its risk scoring of Mr Rocker's IC Portfolio, FCAM reduced the overall score to take account of cases where different investments held at a particular time "hedged" each other i.e. where the relationship between the two investments is such that the risks in each counteract or "hedge" each other. This process of "netting" off the risks of the two different investments therefore produce a "net" risk score for the overall portfolio.
- Mr Rocker's case, based on the evidence of Dr Walford is that, whilst in principle, netting may be appropriate, it can only be done where two assets are "inversely correlated" and it is not clear that, in the present case, the assets which were netted off by FCAM were sufficiently "inversely correlated".
- The methodology used by FCAM for "netting" in this way is set out in Appendix 41 at paragraphs 8 to 11. It states the approach in principle and then gives worked calculations by way of example. The workings of the calculations are not set out in full and are not easy to follow, as observed by Dr Walford in his second report. Nevertheless, the stated approach in principle makes it plain that netting is confined to equity market risk and to offsetting long and short equity positions. In fact the calculation used appears to be "the ratio of long equity to short equity x the risk score for the short equity x 50%".
- The correlation between the price movements of different investments can be scored on a scale of - 1 to + 1. A score of + 1 indicates perfect positive correlation, namely the price of two investments move together such that a 1% increase in one will see an increase of 1% in the other. A score of - 1 indicates perfect inverse correlation, namely if one investment moves in one direction, the other investment will move proportionately in the opposite direction. A correlation of 0 is for the case of two investments where there is no observed relationship between movements in price of one with movements in price of the other; in such a case the investments/assets are uncorrelated. Further, more precisely, where the correlation score is between +0.7 and +1, the two assets are said to be "positively correlated", where the score is between -0.7 and -1, the two assets are said to be "inversely correlated" and where the score is in the middle i.e. between +0.7 and -0.7, the two assets are not correlated (or uncorrelated).
- In his first report Mr Goodyer supported FCAM's approach to and application of net risk scoring (in section 13). At 6 monthly intervals from 30 September 2009 to February 2014, he considered the gross and net risk scores given by FCAM in Appendix 42, and reviewed those scores, giving his own estimated risk score for each. For many periods, the scores were in any event well below 6 and in a number of cases, netting did not make much difference. For the first two periods, as at 30 September 2009 and 31 March 2010, weighted risk scores for Blackrock Gold & General ("Blackrock Gold") and for Royal Bank RBS Zero FTSE Lev Bear were netted off against each other on the basis that they fell, respectively, into the asset classes of "themed equity" (long) and "equity bear" (short). (In the next period, as at 30 September 2010, Investec Global Gold was netted off against three equity bear funds, again on the basis that it was "themed equity".) At §13.11, Mr Goodyer described the Blackrock Gold investment as "an unleveraged unit trust investing in commodity shares focusing on gold and mining companies" and at §13.12 he stated:
- Whilst he considered that, for this period, both the gross risk score and the net risk score in Appendix 42 given by FCAM was lower than he would have scored them, nevertheless he accepted that it was appropriate to offset as between Blackrock Gold and RBS.
- FCAM considered, and Mr Goodyer agreed, that since Blackrock Gold was essentially an equity investment and not a pure gold or commodity investment it could be offset against "equity bear". (As explained below, by contrast, in relation to this specific asset, Dr Walford appeared to consider that Blackrock Gold is to be characterised as "gold" or "commodity" and was not suitable for offsetting against "equity bear".)
- Dr Walford did not initially, in his first report, agree with the principle, nor the application in the present case, of net risk scoring. However both in his second report (§7.42, first sentence) and in his oral evidence he agreed that, in principle, this could properly be done so as to reflect the true risk involved in a portfolio of investments. Nevertheless he did not consider that it had been properly applied in the present case.
- At §29 Joint Memorandum, the experts addressed the issue of net risk scoring and in particular they "disagreed that physical gold and equity bear funds were inversely correlated and hence can be offset in the manner shown". Dr Walford confirmed that in order to net off these two types of investment, they had to be negatively correlated. Mr Goodyer (§29.2), on the other hand, "considered that physical gold and equity bear funds were not correlated and so could be used as a partial offset". He then set out, in a table, correlation values which he had calculated himself, showing values as between the price of gold and certain "bear" indices, ranging between + 0.03 and -0.27.
- In my judgment, it is clear that this passage in the Joint Memorandum was addressing the issue of offsetting for hedging (i.e. netting) and not the separate issue of diversification, as Ms John appeared to suggest in oral closing.
- In his second report, Dr Walford addressed the issue of the "net risk score calculation", including the difference of opinion set out at §29 of the Joint Memorandum (§§7.32 to 7.43). In particular he stated that in his opinion there was no demonstrated inverse correlation between the investments that Mr Goodyer had offset in his report. He went on to criticise Appendix 42 on the basis that it did not appear to have applied properly the methodology in paragraph 10 of Appendix 41 (§7.38). Further, as regards Mr Goodyer's view recorded at §29.2 of the Joint Memorandum, he pointed out that Mr Goodyer's scores in the particular table for "gold v equities" were within the range + 0.33 to -0.33 and that in his opinion gold and equities thus "represent an uncorrelated relationship. Where there is no inverse correlation, in my opinion, the scores cannot be netted against each other".
- However in a footnote and in the next paragraph, Dr Walford acknowledged that, whilst "gold" had little relationship with the equity market, if "gold" or "gold investments" were, instead, categorised as "themed equities" (as opposed to "gold" or "commodity"), then those investments could be netted off against "equity bear funds". He recognised that §5.29 (and footnote) of the s.166 Report suggested that this would be the case where the asset in fact had a closer correlation to the equity index than to the underlying commodity, giving the example of the Investec Global Energy Investment held in the Model Portfolio in January 2010. I do not accept that §5.29 of the s.166 Report was, as Dr Walford suggested, merely a possible argument.
- Thus Dr Walford's conclusions were based on the assumption that Blackrock Gold was properly characterised as "gold" (i.e. the underlying commodity) and not as "themed equity".
- In his second report, Mr Goodyer responded that Dr Walford's comments in his second report, on net risk scoring were wrong for two reasons:
- As regards this second reason, he repeated, and expanded upon, his view (§29.2 Joint Memorandum) that assets do not need to be inversely correlated to be suitable for offsetting and that "uncorrelated" assets can be combined to reduce overall risk: see §§4.09, 4.11, 4.22 to 4.23. In any event, and in relation to the first reason, he repeated (§4.11) "However, for net risking purposes, FCAM only off set equity against equity bear".
- In cross-examination, Mr Goodyer appeared to maintain his position concerning this second reason i.e. that assets with no correlation (as opposed to inverse correlation) may be used to offset each other as part of the risk netting process and that it was only in the case of two assets with strong positive correlation (i.e. + 0.7 or above), that risk scores could not be offset (9/158/21 to 9/159/24).
- In his written closing (§117) Mr Coppel subjected that passage of evidence to a rigorous and effective critique with which I agree. Mr Goodyer's statement that "if [two products] have low correlation the chances are that if one goes up, the other's going to go down and vice versa" is a description of the concept of "inverse" correlation and not of "low" or "no" correlation. His further statement that two zero correlated funds may be used for netting risk because they both move together (either up or down) describes "positive" correlation and not "zero" correlation. Mr Goodyer's evidence that it is appropriate to offset investments where they have "no" or "low" correlation was confused and not credible and I do not accept it.
- In closing Ms John did not seek to rely upon this further basis for "offsetting" risk scores, and agreed that net risk scoring does require inverse correlation. However she did maintain that FCAM (as opposed to Mr Goodyer) had only netted risk where long and short equity positions were held at the same time, that there was no evidence that FCAM had, in Appendix 42, offset in any case other than where the assets were inversely correlated.
- With the exception of the Blackrock Gold issue, little or no evidence is put forward to suggest that any of the other assets which were offset by FCAM, were not "inversely correlated".
- Whilst in his written and oral evidence Dr Walford expressed his disapproval of what had been done by way of netting, he did not put forward any analysis to show that the netting in Appendix 42 was wrong for any particular set of assets. I do not accept Mr Coppel's submission that Dr Walford's evidence showed many of the investments included in the risk netting offset in fact bore little or no correlation with each other. In cross-examination Dr Walford accepted that he had not done the analysis, falling back on the argument that it was for FCAM to show that the netting had been properly done. He merely asserted "you haven't got similar types of funds that are being netted off against each other" (8/159/6-8).
- By contrast, in addition to the detailed figures for the netting process given by FCAM itself in Appendix 42, the s.166 Report (particularly at §§5.18, 5.24 and 5.29) and the 2013 Miller document supported the conclusion that it had only been carried out in respect of long and short equity positions.
- The only point of difference identified, in the reports, appeared to lie in the correct characterisation of "Blackrock Gold". I am satisfied on the evidence that FCAM itself did classify "Blackrock Gold" as a "themed equity" asset type and not as "gold" or a "commodity", considered that it was "inversely correlated" to "equity bear" assets and thus that it was appropriate to offset its risk score against that of the "equity bear" assets. That is what FCAM did and Mr Goodyer did not consider that to be inappropriate, when reviewing the net risk scoring.
- On the evidence, the Blackrock Gold investment comprised essentially shares in mining companies, rather that a direct investment in gold as a commodity. Blackrock's own "fund sheet for performance up to 31 July 2009" itself stated that the fund is a specialised unit trust investing in shares in gold, mining and precious-metals. Although in cross-examination, (9/155/5-7) Mr Goodyer accepted that Blackrock Gold was part physical gold and part gold mining and instruments relating to mining and that they would come under the category of "commodities if we were to put them in a large circle", subsequently he said he understood Blackrock Gold to be more invested in equity related to mining than to the physical assets – it was a fund buying into shares in mining companies (9/163/12-14). It is "themed" equity, where the theme is gold and other metals.
- Moreover, there is the point made in the s.166 Report that shares in commodities may well be more closely correlated to equities in general than to the underlying commodity.
- By contrast, I have seen no sufficient evidence to contradict that categorisation. Whilst I accept that Dr Walford considered that "gold" was not inversely correlated to "equity bear", his own evidence that Blackrock Gold was "gold" rather than "themed equity" was not substantiated.
- I reach the following conclusions on net risk scoring:
- First, in the light of the foregoing, in my judgment, the relevant risk scores for Mr Rocker's IC Portfolio over time are those in the second version of Appendix 42, namely the scores calculated by FCAM (and not Mr Goodyer's modified figures nor Dr Walford's figures including + 1 for diversification). Further I take FCAM figures and not Goodyer figures – because any differences are within the margin of a reasonable range of differing views.
- Secondly, for the purposes of breach of mandate, the upper band for the medium risk is 6.5.
- Thirdly, applying these parameters and the scores in Appendix 42, I conclude that FCAM was in breach of the medium risk mandate for Mr Rocker's IC Portfolio over 9 monthly periods, between November 2009 and January 2010, in August, September and November 2010, and in February, April and December 2011. The particular net risk scores for each of those months is set out in Appendix 42 itself.
- For those reasons, I conclude that FCAM acted in breach of mandate in breach of clauses 2.3 and 3.1 of the 2009 Client Agreement.
- The performance benchmarks for the IC Portfolio were, initially, outperformance of the return on Bank of England base rate and subsequently the APCIMS Balanced Portfolio Index. (There is an immaterial dispute as to whether the change occurred in September 2011 or June 2012). Mr Rocker alleges that FCAM breached its obligations under clause 2.9 of the 2009 Client Agreement (set out in paragraph 80 above) in failing to adhere to the asset allocation implicit in those two benchmarks. This case is founded upon the claim, made by Dr Walford, that there is implicit in the, or indeed any, performance benchmark a requirement as to the nature of the assets (or asset allocation) within a portfolio. In his first report, he stated "A non-cash benchmark always provides some indication of what the assets will be invested in" (§7.30). Thus where an APCIMS Balanced Portfolio is taken as the performance benchmark, then the asset allocation within the portfolio itself is required to reflect the types and risks of assets held within the APCIMS portfolio. His conclusion in his first report was that "the asset allocation in Mr Rocker's IC Portfolio bore no resemblance to what was indicated by the underlying benchmark."
- In my judgment, this claim is unfounded. First, it is clear from the terms of Clause 2.9 both in the 2009 Client Agreement and in the 2012 Client Agreement that its purpose was to set a performance measure and not an obligation either as to asset allocation within the Portfolio or as a guarantee of a certain level of performance on the investments within the IC Portfolio. Clause 2.9 sets out an "aim" not an end result, nor indeed a particular means to an end result. Dr Walford accepted this in cross-examination (8/32/8-10), as did Mr Coppel in closing.
- Secondly, in argument, Mr Rocker referred to the terms of COBS, albeit without alleging any breach. COBS 6.1.6(1) provides:
- Thirdly, the claim that clause 2.9 imposed an asset allocation obligation is defeated by the fact that until September 2011 or June 2012 the contractual performance benchmark was effectively to outperform cash (funds invested in a bank account linked to Bank of England base rate). As Dr Walford accepted, for that period of time, clause 2.9 did not require FCAM to put all the portfolio into cash and so could not possibly impose an obligation as to asset allocation. (Further support is provided by the 2013 IC Agreement, where the APCIMS benchmark of "balanced portfolio" did not match the risk category of the IC Portfolio of "balanced/aggressive").
- Fourthly, as I have found, the agreed strategy of the IC Portfolio was to invest in falling market, bear products. A more traditional asset allocation in line with APCIMS benchmark was quite inconsistent with that agreed strategy and thus, in this case, the APCIMS benchmark could not have been intended to be a benchmark for asset allocation.
- In oral closing, Mr Coppel modified his case: ultimately, he contended, Clause 2.9 imposed an obligation to invest in a spread of investments in such a way that there was a reasonable prospect that they had a chance of outperforming the benchmark and that putting all assets into bear funds could not have achieved that. I do not accept that submission: clause 2.9 imposed no obligation as to the type of asset to be invested in and moreover investment in bear funds was specifically contemplated and agreed.
- As appears from the formal 6-monthly valuations provided to Mr Rocker by FCAM, the benchmark was used by FCAM as it was intended to be used – as a comparative measure of the performance of the IC Portfolio.
- The following questions arise in relation to the Stop Loss issue:
- Each of these aspects is dealt with in turn below. The question as to what loss was caused to Mr Rocker by FCAM's failure to operate the system of "stop loss" protection is considered under Issue (6) below.
- Mr Rocker's case is as follows:
- FCAM denies that it undertook any binding legal obligation in relation to a "stop loss" policy, regardless of what that policy might mean:
- First, there are two distinct questions: was there an obligation in respect of stop losses? What was the content of that obligation? I recognise, nevertheless, certainly at least in respect of the issue of implied term, that the content of the obligation is highly material.
- Secondly, Mr Rocker did not clearly elucidate the basis of the so-called "representation/collateral contract" claim. However that claim might arise, it has not been put on the basis of a claim for misrepresentation (either arising under the 1967 Misrepresentation Act or in tort). It is not Mr Rocker's case that FCAM made a representation (either of fact or of future intention) relating to stop losses that was false. Rather, in my judgment, what this claim amounts to is a claim that there was representation which became a term of the contract or formed the basis of a collateral contract: see Chitty on Contracts (32nd edn) §§2-174 and 13-002 to 13-003. I therefore consider, together, the issues of express term, representation and collateral contract.
- The Suitability Letter was a contractual document: see paragraph 107(1) above. Further, as a matter of construction, in my judgment, the Suitability Letter did, at the least, impose an obligation and/or contain a promise on the part of FCAM as to what it would do, namely that it would provide "stop loss protection" which would reduce the risk of excessive damage to the portfolio. Once it is established that the Suitability Letter is a document which forms part of the 2009 IC Agreement, a statement as to what FCAM will do constitutes a term of that agreement and amounts to a contractual promise, giving rise to a contractual obligation. The content of that obligation or promise is the subject of the dispute as to the meaning of "stop loss", as used in the 2009 IC Agreement, addressed below.
- Further, even if I am wrong and the Suitability Letter itself is not a contractual document, I consider that both in that letter and in the lead up to the conclusion of the 2009 IC Agreement, FCAM stated, clearly and on more than one occasion, that for the IC Portfolio, it would operate a stop loss policy. These statements were made in the letters of 21 January 2009, 10 March 2009 (and at the meeting on 9 March 2009) and 5 May 2009 in the terms set out above. I consider that these statements were made with the intention that they should have contractual force, rather than being "mere puffs": see Chitty above. In reaching that conclusion, I take account in particular of the fact that the statement concerning "stop losses" was made repeatedly from the outset of discussions right up until, and contemporaneously with, the conclusion of the 2009 IC Agreement, that it was repeatedly mentioned as one of the key features of the IC Portfolio that was being offered to Mr Rocker and that it was included in the Suitability Letter itself. Accordingly, the representation made that they would operate aggressive or tight stop losses was a term of the 2009 IC Agreement. Finally, the alternative claim based on a collateral contract does not arise. First, as FCAM itself contends, the 2009 IC Agreement was made partly in writing and partly orally, so the "parol evidence rule" does not apply. Secondly, the existence of the term I have found is not negated by any other term in the 2009 IC Agreement.
- In the light of the above conclusions, the alternative case that there was an implied term as to stop losses does not arise. In any event, I agree with FCAM's submission on this issue. The test to be applied is set out in M & S v BNP Paribas Securities [2015] UKSC 72 at §§17-21. In particular the implication of a term must be either necessary to give business efficacy to the contract or so obvious that it goes without saying. Here, if, contrary to my conclusion, there was no express term and no collateral contract, in my judgment the implication of a stop loss term would not have been necessary to give the 2009 IC Agreement business efficacy and further was not "obvious" in the sense required, not least because in argument the parties themselves were not able to agree as to what such a term should mean.
- In the light of my conclusion that there was an express term in relation to stop loss to be found in clause 5 of the Suitability Letter, alternatively in the pre-contractual representations to similar effect, the question then is what meaning is to be ascribed to the words "stop loss" or "stop loss protection" as used in the Letter or the earlier letters.
- Mr Rocker's case is that "stop loss" refers to an automatic sale of an investment. Once the value of an investment hit the specified "stop loss" level, FCAM would sell that investment, so as to prevent further losses. He relies upon the following:
- FCAM's case is that "stop loss" is an investment management tool used to monitor and/or to track portfolio holdings and/or underlying indices, whereby alerts are triggered when the price of the individual holding or index falls below, or rises above, a certain level. It constitutes a warning to the investment manager to consider, in the context of the particular asset and the prevailing market conditions, whether to take action in relation to the holding i.e. whether to sell or to hold. "Stop loss" means, and is interchangeable with "alert". It does not connote an automatic sale.
- Mr Rocker cannot establish an agreed meaning of "automatic sale". There is no industry standard meaning. The experts in this case could not agree. Nor is there any evidence that FCAM ever informed Mr Rocker that "stop loss" meant automatic sale. Mr Rocker's assumption to that effect was unjustified.
- FCAM places particular reliance upon two elements, as forming part of the relevant background to the 2009 IC Agreement: first, the terms of the disclaimer in clause 7 of the Investment Management Terms forming part of the 2005 Model Portfolio Agreement; and secondly, the fact that in the years prior to concluding the 2009 IC Agreement, stop losses as operated by FCAM did not in fact operate to prevent serious losses on the portfolio. Both these facts were known to Mr Rocker. In relation to the latter, further, Mr Rocker made no relevant complaint about the non-operation of stop losses.
- I have been referred to a number of cases and considered The Interpretation of Contracts: Lewison (6th edn), where those cases are cited. The following principles are derived from this material.
- The issue is what do the words "stop loss" mean in this contract as used by the parties in the context of the objective background, surrounding circumstances and the object and purpose of the 2009 IC Agreement. That context includes pre-contractual facts and expert evidence, but not evidence of the parties' own subjective understanding of the term or of what was intended by it. Dictionary meanings and case law also provide some further, albeit limited, assistance.
- First, a number of dictionary "definitions" or "explanations" of the term "stop loss" or "stop loss" have been drawn to my attention. All of them are consistent with the "automatic sale" construction advocated by Mr Rocker. In addition to the definition relied upon by Dr Walford (see below), a clear example is that provided by The Economic Times which defines "stop loss" as:
- By contrast, I have been provided with no dictionary definition or description which supports the meaning of "stop loss" as being merely an alert followed by a discretionary decision.
- I have been referred to a number of cases where the term "stop loss" has featured. In none of those cases was the meaning of the term disputed, let alone determined. Thus, what is said there is of very limited assistance here. However in certain of those cases, it is clear that the term "stop loss", in the context of the particular case, was used so as to mean "automatic" sale: see Feldman v Nassim [2010] Lloyds 401 at 405 §12; Bank Leumi v Wachner [2011] EWHC 656 (Comm) at §103,; R v Freeman [2011] EWCA Crim 2534 at §§13-14 and FCA v Da Vinci Invest Ltd [2016] Bus LR 274 at 281 §18. By contrast, there is no case where the term has been, or has been found to have been, used in the sense suggested by FCAM. The most that can be said is that these cases are consistent with, and support, the meaning ascribed consistently in the dictionaries – and Dr Walford's evidence.
- In my judgment, the evidence of Dr Walford and Mr Goodyer is admissible on this issue of the meaning of "stop loss". To the extent that "stop loss" is a non-legal technical term (term of art), which I think it is, then expert evidence as to its meaning is admissible. For that evidence to be admissible it is not necessary to show that the experts agree as to the meaning. (Indeed if it were agreed, there would be no need to call that evidence). On the other hand, although the dividing line is fine, I do not consider that the issue here is one of "trade usage" in the sense of a customary meaning in a trade and I do not admit the expert evidence on that basis.
- Dr Walford's evidence in his first report (§§7.31 to 7.32) started by referring to a dictionary definition of "stop loss" taken from "1001 financial words you need to know". Oxford University Press, as being "denoting relating to an order to sell a security or commodity at a specified price in order to limit a loss". His opinion is that "in normal parlance the term is usually understood to mean that a sale decision is made on a reasonably automated basis, however in a fast moving market this is not always achievable as prices can move too fast.". When addressing the issue of "tight" or "aggressive" stop losses, his evidence became less clear, raising the implication that in other ("non-tight") cases, "stop loss" had some element of discretion on the part of the investment manager (§7.37). Nevertheless, at a later point in his report (§7.89), in the joint memorandum and in oral evidence he firmly maintained his view that "stop loss means an almost automatic sale" (8/185/9-14) (and there was nothing in FCAM's documentation that suggested that it intended "stop loss" to mean anything other than this "generally understood meaning"). In practice "stop losses" were used by those who were not present all day and so rarely used by discretionary investment managers. "Alerts" were something different from "stop losses". FCAM in fact used "alerts". As regards "tight/aggressive" stop losses, in his oral evidence (8/189-196) he maintained his position that a figure of 5% "seemed to me to be a reasonable level" and rejected the suggestion that he had given a range of between 5% and 30%, because he thought that such a range was reasonable. He explained that in earlier periods of market volatility he would have fixed the figure at a higher percentage. However by May 2009 volatility was on the decline and "for collective investment funds made up of a group of assets, 5% seems to me to be about right" (8/195/2-12). This evidence on this aspect was, in my judgment, clear and convincing. In answer to my questions, he disagreed with Mr Goodyer's explanation that automatic stop losses were rarely used following the crash in 1987. He believed they are used quite extensively, referring to press reports in January 2015 arising out of a Swiss bank problem in the currency markets.
- Mr Goodyer's evidence in relation to the meaning of "stop loss" (first report, §§9.06 to 9.09) was that, whilst they are used in modern investment management, they are rarely active trigger points to automatically force a sale. This was due to the market crash in October 1987 when computer-driven stop losses triggered a massive fall in the market. As a result, since 1987 the use of "automated" stop losses had diminished and are now only used primarily internally by investment managers to alert them to a level of loss that has occurred enabling the investment manager to then decide whether to sell or to retain. At §16.01, he drew a distinction between a "computer driven" stop loss and one which has to be signed off by an investment manager. I note that he did not say, in terms, that in the latter case this is anything other than an automatic sale involving action taken by a human being rather than a computer. He made no reference to any dictionary definition or any other market practice. In the joint memorandum, Mr Goodyer expressed the view that a "stop loss" was effectively an "alert" and that the two terms were synonymous. He claimed that specific paragraphs of Dr Walford's report supported his own position. But I agree with Mr Walford that they did not.
- His oral evidence was confused and he used a range of different terminology in seeking to address the issue. Having stated in the Joint Memorandum that "stop loss" and "alert" were synonymous, in cross-examination (9/178/8 - 180/15) he said the following:
- In summary, first he said that "stop loss" and "alert" are synonymous; then that they are not interchangeable and then, that they are the same thing. Moreover at various points in his evidence he uses the terms "stop loss", "alert" "stop alert" and "stop loss alert", without clearly distinguishing between these terms or explaining whether they have the same or different meanings. In addition there is little or no documentation in the case using the term "alert" and certainly no reference to "stop alert" or "stop loss alert".
- Further as regards the level at which an "aggressive" stop loss might be set, initially Mr Goodyer suggested that a realistic level would be "at least around 15% maybe 20, even 25 for some investments" (9/186/9). However, when challenged, he accepted that he could not point to any document which suggested that "tight"/aggressive" stop losses could mean setting a figure of 25%. He responded that he had used those figures just by way of illustration and that in fact stop loss would be set depending on the individual circumstances of the particular asset. He then went on to suggest, in his oral evidence, that "aggressive" merely referred to the speed with which the alert should be considered by the investment manager, rather than being a reference to the level at which the alert would be triggered. In my judgment there was no previous evidence to suggest this meaning and I do not accept it.
- I prefer the evidence of Dr Walford on these issues. Whilst his evidence was not, at all times, entirely clearly expressed, overall his evidence was that, in general, the default position of a stop loss is a trade. In oral evidence he robustly maintained his position that is, essentially, a "stop loss" led to an automatic or a semi-automatic sale and was to be distinguished from an "alert". This evidence was backed up by dictionary definitions and explanations. By contrast, Mr Goodyer' evidence was not convincing. His confusion over terminology and whether "stop loss" and "alert" were or were not the same thing, coupled with the absence of other support for the "discretionary" meaning of "stop loss" undermine the reliability of his views. Accordingly, I do not accept his evidence that, in general and regardless of the meaning of any other terms such as "alert", the term "stop loss" has the meaning which he said it had.
- Further Dr Walford's oral evidence about the meaning and level of "tight" or "aggressive" stop losses was clear and cogent; by contrast, Mr Goodyer's evidence on this was unconvincing.
- Mr Rocker, Mr Robson and Mr Selsby all gave evidence as to their understanding of the term "stop loss" as used at the time. For the reasons already given, that evidence is not admissible in so far as it is evidence of each party's subjective intention. Nevertheless their evidence in relation to facts which form part of the factual background is relevant.
- In his evidence, Mr Rocker was clear that no-one at FCAM had ever mentioned to him anything about "alerts" as opposed to "stop losses". He accepted in cross-examination that FCAM had not stated explicitly that stop losses worked "automatically". He was aware that the stop loss system was a management tool. He had not complained about a failure to apply stop loss policy because at the time he had no relevant documents and had not any basis to establish such an allegation.
- The evidence of Mr Robson and Mr Selsby was largely directed to something which they addressed as "alerts". Mr Robson's written evidence wholly avoided reference to the term "stop loss". He explained that the system of "alerts" which he described was known by Mr Rocker throughout his previous four year history of using FCAM's discretionary management services and commented that Mr Rocker had never questioned or raised any concern about the application of this management tool. Similarly although Mr Selsby in his evidence largely avoided such references, where he did refer to "stop losses", he said that the terms were synonymous. In cross-examination (7/52-59) he accepted that in correspondence with Mr Rocker that the policy was invariably referred to as "stop losses" and not "alerts". He then, confusingly, referred to the policy as "stop losses alerts" and then "stop loss or alert" (7/55/1-5). He accepted that FCAM did not historically keep records of alerts being triggered, nor was there any record of the setting of the trigger figure for each particular investment. No record was kept of how the trigger level is set and there was no fixed percentage of the level at which the alert system would be set off. Following further questions from myself, he could not clearly explain how the alert level had physically been set.
- In summary, and so far as relevant to this issue, I find, first, that there is no evidence that at any time prior to the conclusion of the 2009 IC Agreement, did FCAM make any reference to the word "alerts", let alone inform Mr Rocker of such a term nor explain what, it now says, a system of "alerts" involves. As to whether Mr Rocker was aware, prior to May 2009 of FCAM's practice in this context - regardless of terminology - this is addressed further below. I am further satisfied that in its evidence and submissions on this issue, FCAM has caused confusion by using varying terminology and has avoided referring to the term "stop loss".
- Mr Rocker points, at some length, to the way in which FCAM used "stop loss" in its dealings with him after May 2009, and in particular in a substantial number of pieces of correspondence and documents where, so it is contended, FCAM referred to "stop loss" and "tight stop loss" and in all cases effectively indicated that the language used indicated an "automatic" sale. I agree that in some, but not all, of these instances (see for example, FCAM's three sixty newsletter issue 638 and emails to Mr Robson dated 16 March 2011 and 15 February 2012) the language used by FCAM strongly indicates that it was using "stop loss" to mean an automatic sale. However, to the extent that these statements are "post-contractual", they do not assist on the question of construction. However, insofar as it might be said that in January 2013, a new contract and new "stop loss terms" were concluded, it seems to me that these documents insofar as they pre-date January 2013 are relevant factual background to that new agreement.
- I turn to look at the direct dealings between the parties prior to the conclusion of the 2009 IC Agreement in so far as they shed light on the meaning of the term "stop loss" as forming part of that agreement.
- Mr Robson's letter of 21 January 2009 (paragraph 70 above) positively asserted that for the IC Portfolio the aim will be to mitigate the downside by preserving profits and running "more aggressive stop losses to prevent losses accruing". This is said in the context of the fact that capital preservation was fundamental to the plan. The reference to "more aggressive" suggests a stricter policy than that applicable to the Model Portfolio. Again, in Mr Marsh's letter of 10 March 2009 (paragraph 77 above) further emphasis is placed on stop losses, stating that "risk management will be central to the process with tight stop losses on all holdings". (Mr Marsh's manuscript memo of 9 March 2009 is to similar effect). The statements were all made in the wider context that the IC Portfolio would involve a wider range of investments and more frequent trading than in the Model Portfolio. In the letter of 5 May 2009 enclosing three contractual documents in that letter, FCAM repeated that statement made by Mr Marsh in the letter of 10 March 2009.
- As to the terms of clause 5 of the Suitability Letter itself (set out in paragraph 83 above), I do not accept FCAM's submission that, as a matter of construction of the words used, this is an explanation of the "discretionary" approach to "stop losses" and that the references there to holdings being hit "quite hard" and "excessively damaging", indicate that the stop loss policy would not protect against losses greater than 5%. Rather the Suitability Letter refers to "protection" and reducing the risk of excessive damage. That is not inconsistent with automatic sale, because by definition at the point of such an automatic sale there will have been a loss and "quite hard" does not necessarily mean more than 5%. Indeed, in this context, FCAM goes on to say, in the letter, that it did "everything in our power" to prevent significant losses.
- In the course of dealings before the conclusion of the 2009 IC Agreement there is no reference to the term "alert" or "stop loss alert" and no express explanation of a system of monitoring, alerts and discretionary decision-making.
- Further, in my judgment, as a matter of linguistic meaning, the word "alert" connotes something different from the words "stop loss". "Stop loss" describes the end result – the objective, namely to stop losses. By contrast, "alert" describes a process of putting on notice without necessarily achieving an end result. Since the term "stop loss" was used in the context of the objective of capital preservation and avoiding excessive loss, this is further support for an intention to achieve the objective.
- In my judgment, all these factors support Mr Rocker's construction of "stop loss".
- FCAM relies upon the terms of clause 7 of the 2005 Model Portfolio Investment Management Terms (set out in paragraph 63 above) and Mr Rocker's experience, before May 2009, in relation to the Model Portfolio, to contend that stop losses as operated by FCAM did not prevent serious losses and did not operate automatically.
- As regards clause 7, FCAM points to the words "monitoring" and that by its terms FCAM disclaims responsibility for "any losses, which may occur". In my judgment, this clause does not clearly point to the "discretionary" alert system contended for by FCAM. First, the clause positively asserts the use of a "Stop Loss" system, not only for the purpose of monitoring, but also for "managing" investments. Secondly, as regards the second sentence, an "automatic sale" stop loss system, by definition, involves losses occurring up to the level of the trigger point; so a statement that there is no guarantee against losses is consistent with such losses. Thirdly, the disclaimer of responsibility for "any losses" is consistent with disclaiming responsibility for the losses up to the level of the trigger, and not an exclusion in respect of any further losses which would occur in the event that the automatic sale was not put into effect. Finally the express use of the term "stop loss" merely begs (rather than answers) the question as to the proper construction of that term.
- Further as regards "stop losses" in the context of the Model Portfolio Agreement, the terms of Mr Marsh's comment on the Investment Risk Definitions document, in his covering letter of 15 December 2005 (at paragraph 65 above) provides further support for "automatic sale", by strongly suggesting that "monitoring" and "stop losses" are distinct risk management tools and to the reference to "stop losses" simply, rather than to a system or to alerts.
- As regards Mr Rocker's failure to complain in the face of losses sustained in 2007 under the Model Portfolio, FCAM relies upon Mr Marsh's file note of 20 August 2007 recording Mr Rocker expressing serious concern at that time about having made a loss on the Model Portfolio and the fact that at that time he did not raise the issue of "stop losses". In cross-examination, Mr Rocker pointed to the fact that he was not responsible for the content of the file note, but did not claim that he had, at that time, raised the stop loss issue. Nevertheless, in my judgment, it is not possible for this failure to raise the issue at the time to be relied upon either to support a particular construction of "stop loss" as used in the Model Portfolio Agreement, nor as evidence of a clear understanding on the part of both parties of its meaning as used subsequently in the 2009 IC Agreement, nor to spell out of it the clear terms of the "discretionary alert" system advocated by FCAM.
- I conclude that, in general, the term "stop loss" when used in connection with financial investment practice indicates a procedure which leads to an automatic or semi-automatic sale of the investment in question. This construction is suggested by the words themselves; it is supported by dictionary definitions and explanations placed before the court and is consistent with the limited case law. More significantly, the balance of the expert evidence as to meaning, part of the relevant admissible background, which I prefer and accept, is to the same effect.
- Turning to the use of the term in the present case, there is no sufficient evidence as to the background and purpose of the 2009 IC Agreement to suggest that that general meaning was displaced by a discretionary "alert" procedure of the type contended for by FCAM. I do not accept that it was for Mr Rocker to establish an "agreed meaning" of automatic sale; that approach would only arise if I had concluded that, in general, the term "stop loss" referred to a discretionary alert procedure. There is no evidence, either in general materials or in contemporaneous documents prior to the conclusion of the 2009 IC Agreement, referring to an "alert" procedure. Rather the context for the conclusion of the 2009 IC Agreement confirms that by the term "stop loss" a reasonable person in the position of the parties would understand it to refer to "automatic sale".
- For these reasons, I conclude that in the 2009 IC Agreement the term "stop loss" means an automatic sale, once the value of an investment has hit a specified "stop loss" level. I further conclude that in the present case, "aggressive" or "tight" stop losses means that the trigger point for the automatic sale was 5%. Further, I do not consider that subsequent evidence is sufficient to establish that a different meaning is to be given to "stop losses" either in the 2012 IC Agreement or in the 2013 IC Agreement. In the former, the Questionnaire referred to "stop losses" (albeit there was also a single reference to "stop loss alerts"). In the latter, clause 2.10 was in the same terms as clause 7 of the 2005 Model Portfolio Investment Management Terms.
- There is a substantial dispute of fact as to whether, and if so, how FCAM in fact operated a "stop loss" system. Mr Rocker's case is that FCAM has brought forward no evidence showing that it properly operated such a system on the IC Portfolio and further that FCAM's sale policy is irreconcilable with it having properly operated such a system. Mr Rocker suggests that FCAM did not actually set any trigger levels on any investments and further questions how, and by whom, subsequently disclosed deal sheets came be endorsed "stop loss" and that those endorsements do not accurately record the reason for a sale in any particular case. FCAM by contrast submits that it did apply the stop loss policy for which it contended. There were alerts, following which the investment manager decided, in his discretion, whether to sell or not to sell and these are adequately evidenced.
- However, FCAM's case here is predicated on its own case as to the meaning of "stop losses" and it is inherent in that case, that FCAM did not operate a policy of automatic sale upon the trigger point being hit. Having found that "stop loss" did connote automatic sale at a level of 5%, it follows that FCAM was necessarily in breach of the stop loss term in any case where an investment whose value fell below the relevant stop loss trigger point was not sold at that point, but retained. I conclude that in all such cases, FCAM failed to operate the stop loss policy, in breach of the 2009 IC Agreement and subsequent IC Agreements. It follows that there is no need to identify, in the case of each investment, the relevant trigger level applied and whether it was or was not sold at that particular trigger point.
- In the course of the litigation Mr Rocker has made very wide ranging and disparate allegations of breach of COBS, both as regards the factual allegations and the provisions of COBS said to have been contravened. By closing, this regulatory case was advanced very much as his secondary case, and is summarised under the three heads:
- Mr Rocker here alleges breaches of the various provisions of COBS 9.2. It provides, inter alia, as follows:
- COBS 9.3 is titled "Guidance on assessing suitability". It provides, inter alia, as follows:
- Mr Rocker contends that, as at May 2009, no proper suitability assessment was made before the 2009 IC Agreement was entered into. There was no adequate and up-to-date exploration of his knowledge or experience, no adequate Attitude to Risk assessment was undertaken and no evidence was provided of a change in risk, as alleged. Further no ongoing suitability assessments were undertaken, in breach of COBS 9.3.1. That there were such failings is apparent when contrasted with what FCAM did in this regard in June 2012, when the 2012 IC Agreement was concluded: namely completion of the FinaMetrica Profile and the Questionnaire.
- FCAM submits that COBS 9 had limited application to the IC Portfolio, because the IC Portfolio was a service and one provided on a discretionary management basis. In so far as it applied to individual decisions to trade made in the course of the IC Portfolio, there were no breaches of any of the requirements of COBS 9.2.2(1)(a), 9.2.2(1)(b) or 9.2.2(1)(c).
- I agree that the requirements of COBS 9.2 do not fit readily to the conclusion of an overriding agreement to offer a discretionary investment management service – in this case to the conclusion of the IC Agreements themselves. FCAM submits that this was not a case of personal recommendation and the agreement to provide the IC Portfolio service was not itself a "decision to trade". There is some merit in this point. (I note however that such an argument was rejected by Ombudsman in the case of another client: FCAM v Financial Ombudsman, supra, at §45). In any event, I consider that in the course of providing the discretionary investment management service, FCAM made serial "decisions to trade" and the suitability requirements of COBS 9.2 applied.
- As to COBS 9.2.2(1)(a) and 9.2.2(2), FCAM obtained information in relation to Mr Rocker's investment objectives, including the strategy to be followed: see paragraphs 107(2) and 108 above concerning agreed investment objectives and strategy. However as regards Mr Rocker's preferences regarding risk taking and his risk profile, whilst I have found above that the agreed risk profile for the IC Portfolio remained at "medium", in my judgment, at the time of conclusion of the 2009 IC Agreement, and given the particular nature of the IC Portfolio, I consider that FCAM did not do sufficient to ascertain the detail of Mr Rocker's attitude to risk; it did not undertake a sufficiently detailed attitude to risk assessment. This is illustrated not only by the fact that there was, in fact, no documented assessment as envisaged by clause 2.3 of the 2009 Client Agreement but also by the detailed process subsequently undertaken in June 2012. However, absent a contention that had an assessment been carried out, Mr Rocker would not have entered into the 2009 IC Agreement at all, this failure caused no additional loss. If such an assessment had been carried out, then, it is highly likely that Mr Rocker's customer risk profile would have been assessed as "medium". I have found that, in fact, that was the relevant applicable agreed profile, then existing. On the other hand, if his profile had been assessed, as at May 2009, as "medium/high", then Mr Rocker's position would have been worse.
- As to COBS 9.2.2(1)(b) and 9.2.2(3), FCAM had detailed knowledge of Mr Rocker's financial position (and his investment objectives) from 2003 onwards and it obtained updates as to financial position in the course of the operation both of the Model Portfolio and subsequently of the IC Portfolio: see letters of 17 June 2003, 7 November 2005 and file notes of 4 July 2006, 9 March 2009 and August 2010, and, subsequently the FinaMetrica Profile and the Questionnaire.
- As to COBS 9.2.2(1)(c) and 9.2.3, in the course of the operation of his Model Portfolio, Mr Rocker gained detailed knowledge, experience and understanding of the service there provided, the bear strategy pursued and the types of investment likely to be invested in. FCAM had provided Mr Rocker with explanations of bear notes and structured products which were also used subsequently in the IC Portfolio. For example, a letter dated 3 July 2006 recorded a meeting the previous day attended by Mr Rocker where the structure of bear funds, and one in particular, was discussed and explained. In cross-examination (4/178/9) Mr Rocker accepted that it appeared that the product was discussed and explained at that meeting. On 21 August 2007, following a meeting earlier that day, Mr Rocker was sent the fact sheet for Société Generale bear fund (Global Index Bear Accelerator 6Y Note). That sheet explained in some detail how the Note operated and, in particular stated "The Bear Accelerator is capital protected with a protection of 1%. All capital invested is at risk". In cross-examination, Mr Rocker accepted that if he had received that letter (as to which there was no suggestion (4/194/9-10) that he did not) he had been shown the structure and terms of a bear note product. Further documents record Mr Rocker's knowledge and discussion of bear funds: internal file note dated 23 October 2006 and 3 August 2007. In cross-examination he accepted that a letter of 15 August 2007 evidenced Mr Rocker giving instructions not to sell bear funds and information being given about moving into derivative structures which would reduce downside risk. As Mr Rocker knew, the types of investments in the IC Portfolio were similar to those in the Model Portfolio, as recorded in the 9 March 2009 file note. Mr Rocker was aware, and agreed to, the investment strategy for the IC Portfolio: see paragraph 108 above. Further in this regard, Mr Rocker's own experience and his level of education and profession are relevant: COBS 9.2.3(3). This is set out in paragraphs 5, 43 to 44 above.
- Mr Rocker makes two further allegations relating to COBS 9 and suitability. First, he alleges that FCAM breached COBS 9.3.1 by allowing the risk level of the IC Portfolio to exceed the agreed level of investment risk. I have already found that FCAM did allow the risk level to exceed the agreed medium portfolio risk profile and that this constituted a breach of the IC Agreement. In so far as exceeding the agreed risk profile renders the portfolio "unsuitable", then it does seem that allowing the risk level to breach the mandate would give rise to a breach of COBS 9.3.1(2), although it would appear that that provision relates to specific transactions. In any event, in my judgment, even if breaching the mandate in this way gives rise to a breach of statutory duty, it adds nothing, in terms of causation and loss, to my prior finding of breach of contract.
- Secondly, Mr Rocker further contends that the IC Portfolio was not "suitable" for him and/or that FCAM recommended the IC Portfolio which was not suitable. It is not clear which provision of COBS this is said to breach. In so far as COBS 9.2.1(1) is referred to, that covers only either a personal recommendation or a specific decision to trade. In so far as COBS 9.3.1 is referred to, this is addressed in the previous paragraph. In written closing (§185), this contention was based only on the breaches of the specific COBS rules which I address in any event in this section.
- Here Mr Rocker alleges breaches of COBS 2.2, 4.5.2 and 14.3.2. COBS 2.2 provides:
- COBS 4.5 includes a "general rule" as follows:
- COBS chapter 14 includes under the heading "Providing a description of the nature and risks of designated investments" the following:
- Mr Rocker contends that, in breach of COBS 2.2.1, no sufficient information was given to him as to the types of investment to be used in the IC Portfolio, that that information had to be provided in comprehensible form and there was no adequate documentation recording such information being given to Mr Rocker before he entered into the IC Portfolio. No investment strategy was agreed and in any event there was no written agreed strategy, as required by the Risks Warning Schedule to the 2009 IC Agreement. The Risks Warning Schedule did not meet the requirements of COBS 14.3.2. In particular it made no specific reference to bear notes or ETFs and contained no comprehensible categorisation of risk of products – low, medium or high. Mr Rocker was unable to make an informed decision about the products going into the IC Portfolio.
- First, the relevant COBS provisions do not require information to be provided in any particular form, documented or otherwise, as long as it is provided in comprehensible form. This is clear from the use of the word "may" in COBS 2.2.1(2).
- Secondly, I do not accept Mr Rocker's submissions relating to the investment strategy. As I have found paragraph 108 above, Mr Rocker knew of, and agreed to, the investment strategy for his IC Portfolio. There was an agreed strategy. Further, there was no requirement under COBS for the agreement to the investment strategy to be in written form or to be recorded in documentation. Nor, apart from clause 2.3, did the 2009 IC Agreement in general, nor the Risks Warning Schedule in particular, impose such a requirement. If and insofar as clause 2.3 itself required a written strategy, any failure to provide one caused no distinct loss.
- Thirdly, as regards the provision of information about the particular investments made, in principle COB 2.2.1 applies to the provision of information before beginning of discretionary investment management service. In the present case, sufficient information was provided before the conclusion of the 2009 IC Agreement. As regards the types of investments, the IC Portfolio was a variant of the Model Portfolio. Mr Rocker knew from the outset that the 2005 Model Portfolio Agreement involved investment in "bear funds": see 2005 ATR Document. As indicated above, in the previous 3½ years, Mr Rocker had been provided with substantial information relating to the operation of the Model Portfolio (including quarterly meetings and accompanying documents and formal valuations). The information provided included information relating to bear notes and gearing. Further the documentation provided in the lead up to the 2009 IC Agreement contained substantial information about the types of investments: for example, the letter of 21 January 2009 made clear the categories of investments which would be available, including "long and short". In particular the Risks Warning Schedule explained the risks in a variety of types of investments, including listed securities involving gearing. Further, the information provided was such that "the client is reasonably able to understand the nature and risks of the service." In this context, Mr Rocker's own background and knowledge and previous experience is highly material to the issue of the "appropriate" level of information. In my judgment Mr Rocker was given sufficient information so that he could understand the nature and risks involved in the IC Portfolio.
- As regards COB 14.3.2, FCAM submits with some force that its provisions do not readily apply to a discretionary management service, such as the IC Portfolio (as opposed to advisory managed services where the client takes the investment decision). Nevertheless even assuming that they do apply, in my judgment FCAM provided information both about its service and about the investments it would consider making in the course of the operation of that service. Further FCAM provided information about most (if not each) of the transactions during the operation of the IC Portfolio. As demonstrated by the very substantial documentation relating to Mr Rocker's IC Portfolio, there were regular client meetings (initially fortnightly, and then weekly) evidenced by notes and emails. Documents were provided to Mr Rocker to accompany those meetings, including chart packs and current valuations. More detailed six monthly valuations were provided and there were fortnightly newsletters sent out, which covered many of the investments within Mr Rocker's IC Portfolio. Fact sheets about particular investments were provided and there were discussions about them too. As regards complex instruments, such as leveraged bear funds, in my judgment, since the IC Portfolio was a discretionary management service, FCAM was not required to explain to Mr Rocker the detail of the underlying complexity of how the investment operated, as long as the general nature of the investment and its risks were understood. Sufficient information was provided in the product notes and in the Risks Warning Schedule. By employing FCAM as discretionary investment manager, Mr Rocker was entrusting matters to FCAM. Further, the status and level of knowledge of the client falls to be taken into account in considering the nature of the information to be provided. As indicated above, Mr Rocker was a sophisticated investor with a good degree of knowledge not just of general equity markets, but also investing in more complex instruments through his experience in the Model Portfolio. I do not accept that Mr Rocker was kept in the dark about the features and risks of the products held in his IC Portfolio. Mr Goodyer's evidence (at §§9.15 and 11.08 of his first report) was that the level of detail in the information provided to Mr Rocker was sufficient and that it was not necessary for him to understand each and every underlying detail. I agree.
- In conclusion, I find that FCAM did not fail to provide sufficient information either about the investments or the investment strategy.
- COBS 9.5 addresses "Record-keeping and retention periods for suitability records". It provides, inter alia, as follows:
- Mr Rocker submits that COBS 9.5.2 required FCAM to keep its suitability records for a minimum of 3 years and that Mr Selsby and Mr Goodyer admitted that there were no such records. This failure, he says, exacerbates a concern that FCAM itself did not understand the features and risks of the products.
- COBS 9.5.2 requires a firm to keep "its records relating to suitability" for minimum periods. Whilst Mr Rocker has not specified precisely what records should have been kept, it appears that there may well have been a failing in this regard on the part of FCAM. The s.166 Report found such failings in relation to the Model Portfolio: see paragraph 100 above.
- However, in my judgment, in the present case, and in view of my findings in relation to the substantive information obtained and provided, any breach of the record keeping requirements did not cause Mr Rocker any separate loss. Mr Rocker has not established how a failure to keep records had any effect upon his investments in the IC Portfolio. Indeed, in oral closing, this was accepted by Mr Coppel.
- I conclude that in so far as FCAM failed properly to assess Mr Rocker's attitude to risk prior to the conclusion of the 2009 IC Agreement and further acted in breach of the agreed risk mandate, it acted in breach of COBS obligations, in particular COBS 9.2.2(1)(a) and 9.2.2(2) and 9.3.1. However these breaches add little to the breaches of contract I have found in paragraph 211 above. Any breach of COBS 9.5 caused no separate loss.
- Subject to the foregoing, FCAM did not breach COBS rules. I am satisfied that FCAM both obtained from, and provided to, Mr Rocker sufficient information about his circumstances and knowledge and about the IC Portfolio and the investments within it.
- Mr Rocker seeks to recover two sums: (1) the diminution in value of his IC Portfolio (described in closing as "the capital loss"), and (2) an amount representing an increase in the value of the IC Portfolio that would have occurred, had FCAM performed its obligations under the IC Agreements in accordance with their terms ("the opportunity loss"). The capital loss claim is confined to two elements: loss arising from the breach of mandate and loss arising from breach of FCAM's stop loss obligations, whilst recognising that for the period up to June 2012 ("period 1"), there should be no double-counting of the two elements.
- Whilst the case has been put in a number of ways, in closing, Mr Rocker's claim, at its highest, is for £1,802,424.46 comprising:
- There are thus three main issues on causation and quantum:
- First, Mr Rocker and Dr Walford have put forward substantial analysis of possible quantum calculations. Those calculations were based on underlying data and information provided by FCAM. In my judgment, Dr Walford's analysis was considered and, in the main, at an appropriate level of detail and sophistication. I am guided here by the observations of Leggatt J in Yam Seng Pte v International Trade Corp [2013] 1 Lloyds Rep 526 at §§188-189:
- Secondly, whilst it is clear that Mr Rocker was kept updated with information about the progress of his IC Portfolio and whilst at times he was consulted on decisions and even gave instruction, FCAM has, at no stage, pleaded a positive case based on Mr Rocker's acquiescence or contributory negligence. In any event, in my judgment this was a discretionary rather than an "advisory" management relationship and, as Dr Walford explained in his evidence (8/36-38/) FCAM took full responsibility for the management of the portfolio.
- Thirdly, the amounts claimed under heads (1) and (2) are based on Dr Walford's calculations which in turn are based, in particular, on his analysis of risk scoring and a finding of breach of mandate in 18 distinct monthly periods. However I have found that FCAM was in breach of mandate in respect of only 9 months: paragraph 210 above. Calculations based on my findings have not been provided and so it is not possible to make final findings on quantum of damages. In this judgment, I set out my conclusions on the principles to be applied, leaving the precise calculation of the quantum to be agreed between the parties or the subject of further submissions.
- Mr Rocker's case is that FCAM is liable to compensate him for all losses incurred on his IC Portfolio during periods where the portfolio risk profile was in excess of the agreed risk mandate.
- The essential basis for quantification put forward by Dr Walford is to consider, in respect of each month where the medium risk band was exceeded, the overall profit earned, or the loss incurred, for Mr Rocker's IC Portfolio as a whole, and then to reach a cumulative total of those profits and losses. Because the risk score data provided by FCAM identified a score only at the end of each month, Dr Walford put forward three alternative bases for identifying, as closely as possible given this limitation, the relevant profit or loss at times when the risk score exceeded the mandate. Basis 1 was to include a particular month if, at the start of that month, the risk score exceeded the mandate. Basis 2 was to include a particular month, if at the start or end of the month, the risk score exceeded the mandate. Basis 3 had two elements: first the full profit or loss of a particular month is included if at the start and end of the month the risk score exceeded the mandate; and secondly, in respect of other months, where the risk score exceeded the mandate either at the start or at the end, then half the profit or losses suffered during such month were counted for the purpose of quantifying the compensation. I accept Mr Rocker's submission that basis 3 provides a more accurate method of quantification than either of the other two bases within the confines of the data provided. As matters currently stand, the calculation applying basis 3 will have to be redone, based on the net risk scores of FCAM in Appendix 42, with a range maximum of 6.5. Subject to further observations below, I find that this is the methodology for quantification that falls to be applied.
- FCAM submits that the proper measure of the loss is the difference between the losses that would have been incurred if the risk profile had not been exceeded and the losses which occurred in fact. In practice FCAM submits that quantification should proceed on the basis of identifying the particular trade which, at any particular time, took the overall risk level of the IC Portfolio over the top of the range, take out of the assessment that trade only and treat is as cash and only the loss attributable to that particular trade should be compensated for: see Mr Goodyer's Quantum Report §§3.02 to 3.12.
- I do not accept this analysis. The obligation upon FCAM was to ensure that the IC Portfolio as a whole remained overall within the risk mandate. Once the range was exceeded, the risk inherent in the Portfolio as a whole was exceeded. In any event, it would not be straightforward, at any particular time, to identify the particular trade said to take the portfolio outside risk range. Equally in the counterfactual, FCAM could have kept the Portfolio within the range by measures other than not purchasing that particular asset, such as substituting another asset with a lower risk asset. Dr Walford made these points at §34.2 Joint Memorandum.
- FCAM further submits that Dr Walford's basis of considering performance of investments during periods when the mandate was exceeded, fails to take account of any profits such investments may have made outside those periods. However, Dr Walford's approach does take account, in FCAM's favour, of profits during the periods when mandate was exceeded and, equally, takes no account of losses made outside those periods.
- I have found that FCAM was in breach of contract each time it failed to sell an asset which lost more than 5% of its value.
- The starting point for Mr Rocker's quantification of the loss sustained as a result of these breaches is provided in Dr Walford's first report (§§7.87, 7.97, 7.98). He put forward a variety of calculations for the losses sustained in this connection at different levels of trigger points of stop loss. In the case of a 5% trigger, his calculation was based on calculating the loss on all investments that were sold at a loss greater than 5% loss and subtracting from that total of losses the amount of loss on those investments, had they been sold at a point of 5% loss.
- In footnote 120 to his report, Dr Walford recognised that potentially this basis of calculation might have understated Mr Rocker's loss. His calculation was based solely on the profit or loss on each investment taking the initial cost and the sale proceeds. It was possible that an investment may initially have depreciated below the stop loss trigger, not been sold and subsequently gone on to a profit at which point it was sold. If the stop loss policy had been operated then that profit would not have been realised and so Mr Rocker's loss would be greater. However Dr Walford accepted that that could not be done easily "without having daily valuations for the portfolio and reworking the whole investment history". He continued:
- However, Mr Rocker also recognises that there is a need to avoid a possible element of "double-counting" in respect of the capital loss, arising from a claim both in respect of breach of mandate and in respect of stop loss. That would arise where stop loss damages were claimed in respect of the periods during which there is also a claim for breach of mandate. Accordingly it is accepted that the stop loss damages for such periods fall to be excluded from the quantification. This arises only in respect of period 1. For that period, Mr Rocker contends that it is necessary to identify the periods when the risk mandate was not exceeded and then match those against sales of investments during those periods which should have been, but were not, sold at the stop loss trigger point. For those sales, the stop loss quantum is then calculated on the same basis as the general approach identified above. In this way, there is no stop loss claim for investments sold in those periods for which there is a breach of mandate claim. In my judgment, this is an appropriate way to exclude double-counting of loss in period 1.
- FCAM raises two particular objections to this approach. First, it suggests that it may be, in the case of a particular asset, where there was a failure to sell at the stop loss trigger, nevertheless that asset went on to make a profit. It provides, by way of example, the RBS US Bear (expiry date 25.6.12) acquired on 6 March 2012 which it says, at times showed falls in value greater than 5%, but which was ultimately sold at a profit. However, whilst in principle this would be correct, there is no material before me to show that the assets in respect of which stop loss damages are claimed were, ultimately, anything other than loss making. All the investments listed at §7.87 of Dr Walford's first report are clearly identified as being loss making and neither FCAM nor Mr Goodyer has questioned those analyses.
- Secondly, FCAM submits that Mr Rocker's stop loss analysis is over simplistic. In the counterfactual, if a particular investment had been sold at the 5% trigger, in reality the sums realised would have been reinvested by FCAM in another asset and that investment may equally have made a loss. Indeed FCAM submits that it is highly likely that FCAM would have reinvested in line with the same bear strategy and thus, as matters turned out, that there would have been further loss. In this regard, FCAM points to an email from Mr Rocker dated 19 January 2011 suggesting that, despite his losses, he would have stuck to that strategy. What would have been done, in the counterfactual, with the "realised cash", in principle, might be a relevant consideration. Indeed Dr Walford himself recognises this in the passage cited in paragraph 305 above, before concluding that it was one of the imponderables. However, I do not accept FCAM's argument as a basis for rejecting Mr Rocker's approach to the stop loss quantum. First, such an approach would involve substantial speculation, and would bring in a "whole new set of variables". Secondly, of course, any reinvestment of the realised cash would itself have been subject to the 5% stop loss limit, thereby bringing in the likelihood of an incalculable number of "re-investments" and speculation upon speculation. Thirdly, despite having raised this point in its pleadings and in argument, FCAM has not put forward any suggested re-calculation on this basis, nor has Mr Goodyer addressed the issue. I accept Mr Rocker's approach at paragraphs 304 and 306 above.
- Mr Rocker submits that, if FCAM had complied with its obligations, his £1.5 million investment in the IC Portfolio would, by 21 March 2014, have risen in value. In particular, if FCAM had managed his investment in line with the agreed investment strategy and attitude to risk, had adhered to the asset allocation implicit in the benchmark and had effected or arranged only such transactions as were suitable for Mr Rocker, the Portfolio, instead of declining in value, would have increased substantially. As regards calculation of this opportunity loss, Mr Rocker submits that the opportunity loss fell to be measured by the value of the £1.5 million investment, if FCAM had invested by reference to the APCIMS benchmarks, namely the APCIMS Balanced index up to 30 June 2012 and the APCIMS Balanced/Growth indices from 30 June 2012 onwards.
- In my judgment, this additional claim for opportunity loss is misconceived. The object of an award of damages for breach of contract and/or breach of duty is to put the claimant in the position he would have been in had the contract been performed and/or had the breach of duty not occurred. In the present case the obligations which FCAM did not perform were the obligation to stay within risk mandate and the obligation to operate stop losses. Compensation for breach of those obligations is to put Mr Rocker back in the position he would have been in had those breaches not occurred. In other words, the counterfactual here is FCAM investing in such a way that the risk in the IC Portfolio stayed within the parameters of the medium risk profile and secondly FCAM properly operating the stop loss policy as contractually required. As I have found above, the IC Agreements did not require FCAM, either contractually or as a matter of statutory obligation to manage the IC Portfolio in such a way that, in general terms, particular returns on investments were achieved nor, specifically, that the IC Portfolio achieved returns equal to or better than the contractually stated performance benchmark. In the light of my conclusion in paragraph 213 above that there was no obligation to guarantee returns in line with those benchmarks, there is no basis upon which Mr Rocker can claim compensation for any failure of the IC Portfolio to produce such returns. Whilst he did not sign up to the risk of FCAM acting in breach of its obligations, Mr Rocker was clearly aware of, and took, the risk that the investment, even if properly managed, might be ultimately unsuccessful. To award damages for opportunity loss would have the effect of removing any risk in his investment.
- By way of postscript, I do not consider that the majority judgment of the Court of Appeal in the recent UBS case, supra (§§240-241, 286-287, 294, 298-299, 390) assists Mr Rocker's case on opportunity loss. In the present case the relevant comparator must include the same level of portfolio risk and same strategy as agreed by the parties. In the present case, APCIMS is not the measure of what a reasonably competent investment manager would have achieved.
- In summary my conclusions are as follows
- As regards quantification of damages, the periods for which, and the risk scores upon which, I have found there to have been breach of mandate are different from those which form the basis of Mr Rocker's calculation of damages. Accordingly, the quantum both for breach of mandate and for stop loss will require recalculation. The parties should try to agree this. If not, I will hear further argument. In addition, Mr Rocker seeks interest and FCAM has raised the potential impact of charges, fees and tax upon quantum. If these raise any live issues, they too can be the subject of further submissions.
Mr Justice Morris:
Introduction
Structure of this Judgment
(A) Background (paragraphs 5 to 38
(B) The Issues (paragraph 39
(C) The Evidence (paragraphs 49 to 57
(D) The Legislative Background (paragraphs 58 to 60
(E) Key Contractual Documents (paragraphs 61 to 97
(F) FSA investigation under s.166 FSMA (paragraphs 98 to 109
(G) The Issues: Analysis
Issue (1): Contractual Terms, Strategy and Risk (paragraphs 105 to 142
Issue (2): Breach of Mandate (paragraphs 143 to 211
Issue (3): Performance Benchmark (paragraphs 212 to 218
Issue (4): Stop Loss (paragraphs 219 to 265
Issue (5): The Regulatory Case: Breach of COBS (paragraphs 266 to 291
Issue (6): Loss: Causation and Quantum (paragraphs 292 to 311
My conclusions are stated at paragraph 312 below.
(A) Background
The Parties
The Facts in outline
The Claim in more detail
(1) FCAM operated the IC Portfolio in breach of its risk mandate, and thus in breach of contract and/or its statutory duty arising under the provisions of The Conduct of Business Sourcebook, known as COBS ("the Breach of Mandate claim").
(2) FCAM failed, in breach of contract and/or by way of misrepresentation, to operate "stop losses" ("the Stop Loss claim").
His secondary case is that, in any event, FCAM failed to deal with him in accordance with the COBS rules ("the Regulatory/COBS claim").
(1) The Breach of Mandate claim
(1) For the purposes of the 2009 IC Agreement, from inception until 11 June 2012, Mr Rocker's relevant "attitude to risk" (or "customer risk profile") was medium, as provided for in the 2005 ATR Document, which document was the contractual attitude to risk document referred to in clause 2.3 of the Client Agreement. From 11 June 2012 onwards, his attitude to risk was ("balanced/medium").
(2) FCAM's authority to invest under the IC Agreement – its mandate – was to manage the IC Portfolio so that the overall risk level of the IC Portfolio was "medium" until 11 June 2012 and was "medium/high" thereafter.
(3) A medium risk portfolio is one where the numerical risk rating is kept within a range of 3.5 to 6.5 (out of 10). A high risk portfolio is one where the risk rating is within a range of 7 to 10 (out of 10).
(4) In the period to 11 June 2012, FCAM routinely breached its mandate by failing to manage the IC Portfolio so that its overall risk level did not exceed a numerical risk rating of 6.5. The mandate was exceeded for prolonged periods and by substantial amounts.
(5) In this way, FCAM failed to provide its services in line with the agreed investment strategy and agreed attitude to risk, in breach of clauses 2.3 and 3.1 of the Client Agreement. This breach of mandate further constituted a breach of COBS rule 9.3.1.
(1) All losses incurred on the IC Portfolio where the risk profile on the Portfolio as a whole was above the agreed limit are to be compensated for.
(2) FCAM exposed Mr Rocker's IC Portfolio to greater loss than if the Portfolio had been kept within the agreed range. Those greater risks materialised, leading to the loss in value of the IC Portfolio.
(3) The total loss suffered by Mr Rocker's IC Portfolio during the periods when its overall risk level exceeded its 6.5 limit was £573,229.40.
The Benchmark claim
(2) The Stop Loss claim
(1) It was a term, alternatively a representation inducing Mr Rocker to enter into, the IC Agreement, alternatively a collateral contract, that FCAM would prevent losses accruing by operating aggressive or tight stop losses on the underlying investments in the IC Portfolio.
(2) "Stop losses" meant that once the value of an investment hit the specified "stop loss" level, FCAM would sell that investment, so as to prevent further losses. "Aggressive" or "tight" stop losses meant that the stop loss level would be set at a 5% reduction in the value of the investment (i.e. 95% of its acquisition price).
(3) FCAM, in breach of contract and/or representation, failed to operate stop losses on the investments it made in Mr Rocker's IC Portfolio, but instead allowed losses to accrue and accumulate, before eventually selling.
(4) Failure to sell at the relevant contractually agreed stop loss level in breach of FCAM's duty caused all losses on a particular investment after that point.
(5) As a direct result of this breach, Mr Rocker's total loss on the relevant investments was greater than it would have been, if FCAM had operated stop losses on them at 5%.
(6) The total loss caused by the breach of stop loss policy was £754,285.56. Of this amount, loss sustained, over and above the loss flowing from the breach of mandate, was £368,013.06.
(3) The Regulatory claim
(1) Failed to assess the suitability for Mr Rocker of the service and investments comprised in the IC Portfolio before they were purchased, including failing to obtain sufficient information about Mr Rocker's knowledge and experience, financial situation and investment objectives, in breach of various provisions of COBS 9.2.
(2) Failed to provide Mr Rocker with appropriate and sufficient information about the strategy behind the IC Portfolio, including appropriate guidance on, and warnings of, the risks associated with the investments in question, in breach of COBS 2.2.1, 4.5.2 and 14.3.2.
(3) Failed to keep its or any suitability records for the requisite period of time or at all, in breach of COBS 9.5.
(4) The claim for opportunity loss
The Defence
(1) The Breach of Mandate claim
(1) Throughout the operation of the IC Portfolio, Mr Rocker's own customer risk profile was at the upper end of "medium risk".
(2) From inception of the IC Portfolio in May 2009, the parties intended the risk level of IC Portfolio (or "portfolio risk level") to be "medium, but flexible" and not simply "medium". That means that, depending on particular opportunities, the portfolio risk level could be increased above medium, as long as it was generally a medium risk profile. The numerical range for medium risk investments, either individually or for a portfolio as a whole, is 3.5 to 6.5 with allowances for +/- 0.5 for short durations, such that if the range does not exceed 3 to 7, there is no breach of even a medium risk mandate.
(3) There was no negligent breach of that risk level at all nor in particular in the period May 2009 to June 2012. Even if, contrary to the foregoing, the contractual portfolio risk profile was "medium", there was no breach of that risk level. Taking account, appropriately, of "net risk scoring" and "diversification", there were only two short periods when the IC Portfolio risk score exceeded 7. This did not amount to a breach of mandate because it was for a very limited period or amount and/or it was done with the express knowledge and consent of Mr Rocker.
The Benchmark claim
(2) The Stop Loss claim
(1) "Stop losses" are an investment management tool used to monitor and track holdings and underlying indices, whereby alerts are triggered when the price falls below or rises above a certain level, allowing the investment manager to decide whether to take any action in relation to the relevant holding.
(2) There was no express or implied term, nor actionable representation or collateral contract, that FCAM would seek to protect Mr Rocker's IC Portfolio by the use of stop losses at all, nor certainly in the sense requiring an automated sale of the investment, where the value of an investment declined by a certain percentage.
(3) FCAM complied with any obligations it had regarding "stop losses" on their true interpretation. Following a stop loss alert, sometimes the investment was retained and monitored; sometimes it was sold.
(3) The Regulatory Claim
(1) There was no breach of the suitability rules in COBS 9.2. FCAM obtained from, and provided to, Mr Rocker appropriate information as to his investment objectives, his financial position and his knowledge, experience and understanding sufficient for the strategy and types of investments which were likely to be invested in the IC Portfolio.
(2) FCAM provided adequate explanations of, and provided detailed and sufficient information relating to, the nature of the investments in the IC Portfolio, in compliance with COBS 2.2.1, 4.5.2 and 14.3.2.
(3) There was no breach of any record-keeping obligation.
(4) In any event, any technical breach of COBS, in particular or record-keeping obligations, caused Mr Rocker no loss. A substantial part of the regulatory claim overlaps with, and does not add to, the Breach of Mandate claim.
(4) Causation and quantum
(B) The issues
(1) How was the 2009 IC Agreement concluded, and what were its terms, including, in particular:
(a) Was there an agreed investment strategy for the 2009 IC Agreement?
(b) In the period 2009 to June 2012, what was the agreed customer risk profile and the agreed portfolio risk profile?
(2) Did the actual risk profile of the IC Portfolio, from time to time, exceed the agreed portfolio risk profile (breach of mandate)?
(3) Did FCAM breach its obligations under the IC Agreement and/or COBS in relation to the performance benchmark?
(4) Did FCAM breach its contractual obligations towards Mr Rocker (if any) in relation to stop losses?
(5) Other than in relation to breach of mandate, did FCAM breach any of its obligations arising under COBS, and if so, what, if any loss, did such breach or breaches cause?
(6) Assuming breach of one or more of its obligations towards Mr Rocker, what quantum of loss did any such breach or breaches cause?
(C) The evidence
The witnesses
David Rocker
John Robson
Andrew Selsby
The Expert Evidence
Thomas Walford
Grahame Goodyer
(D) Legislative Background
The Statutory regime
"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"
The Conduct of Business Sourcebook (COBS)
(E) Key Contractual and other documents
The 2005 Model Portfolio Agreement
(1) Investment Management Terms
"Terms of Business
3. Our Terms of Business (as amended from time to time) shall apply to the services supplied under the terms of this Agreement. A copy is enclosed herewith. The contents of this letter are additional.
Investment management
4 …
Investment objectives
(d) We shall manage your investments in accordance with your objectives and the degree of risk you are prepared to accept.
…
Disclaimer
7. We advise on, monitor and manage investments using a "Stop Loss" system. This does not guarantee that losses will not occur and we do not accept responsibility for any losses, which may occur." (emphasis added)
The Schedule to the Investment Management Terms described the portfolio with a value of £1 million. It further stated that the Investment Objectives were "Medium Term Capital Growth".
(2) Attitude to Risk and Loss document (the 2005 ATR Document)
"Summarised below is our understanding of your investment objectives and your attitude to risk and loss. If your views have not been interpreted correctly, it is important that you contact us as soon as possible to clarify your attitude.
Investment objectives
To ensure your capital is invested in line with changing economic conditions, which could include 100% cash on deposit or 100% asset invested and will actively consider special opportunities including index tracking "bear funds".
You have not imposed any specific instructions on the type of investments you may wish to consider, thereby leaving R H Asset Management Ltd free to recommend whatever may seem appropriate having regard to your circumstances at any particular time.
Attitude to Risk and Loss
You regard yourself as a medium risk investor.
…" (emphasis added)
(3) Investment Risk Definitions
"Investment Risk Definitions. These are the FSA's definitions of risk for various investment classes, though, as you will know from our discussions, we feel the investment risk is not just dependent on investment class, but also upon the prevailing and economic conditions and our approach to risk management deals with this by continual monitoring of all holdings and through the use of stop losses. This is for information purposes only, please read and retain." (emphasis added)
The document itself identified the following six categories of risk relating to investments: No Risk; Low Risk (very cautious); Low/Medium Risk (cautious); Medium Risk (realistic); Medium/High (speculative); and High Risk (very speculative). Medium risk, – the category identified in the 2005 ATR Document - was defined as follows:
"This level of risk covers investments into shares of the top 200 UK companies and Corporate Bonds. The value can be volatile but the companies are unlikely to fail totally. UK equity investment and unit trusts in managed funds also fall into this category. Disproportionately large holdings of single shows will increase the risk category.…… Samples of medium risk investments are as follows: –
– Insurance Company Managed Funds
– Managed Funds
– Top 200 UK company shares-M&S, Blue Circle etc
– Investment and Unit trusts-predominantly UK invested
– UK Property Funds
– Managed Currency Funds
– Convertible & Preference shares
– Permanent Interest Bearing shares
– Zero Dividend Shares."
Medium/High risk involved a wide range of shares of international companies and other investments. High Risk investments included Commodity Trading and Futures and Warrant funds. Finally under the heading "Important Note", the Investment Risk Definitions document stated as follows:
"We also blend and weight portfolios so that a medium risk portfolio can have a mixture of low and high risk investments but through ongoing monitoring ensure that the portfolio as a whole remains within the agreed risk profile"
(4) Terms of Business
"8. We shall advise you on the basis of your investment objectives and the degree of risk you are prepared to accept, our understanding of which we shall confirm to you in writing at the time the advice is given. Unless you advise us to the contrary, our advice will be given on the understanding that there will be no restrictions on the types of investment you wish to invest in, nor on the markets on which your transactions will be carried out. We shall, of course, observe any written instructions you give us in this regard."
Model Portfolio Agreement made 19 September 2008
Correspondence and notes leading up to the 2009 IC Agreement
"David has for some time been interested in us offering a model portfolio '+' type of service; our best ideas and more conviction maybe leverage.
Overall David is a medium risk investor but is willing (and capable) to take a higher degree of risk with his investment account as he continues to hold substantial cash resources. His pensions income and interest on cash covers his living expenses, he has no liabilities or commitments and is investing for LT capital growth." (emphasis added)
"As our existing offering works, the aim will be to outperform cash on deposit and more specifically, mitigate the downside by preserving profits and running more aggressive stop losses to prevent losses accruing".
"We would consider the whole of the investment market place as being available; in other words, it could be pure currency plays, commodity related investments, stock markets, individual shares, sectors of stock markets, bonds and even real estate – long or short.
…
Fundamental to the plan is capital preservation, outperformance of cash on deposit and client participation…"
(emphasis added)
Meeting on 9 March 2009
"Greater short term element
75% commonality ... discretion …
Talk more … more correspondence …
Meeting Qly … and telecon in between…
Much stricter about stop losses … keeping gains
...
(a) cost performance related fees ??
(ii) Eggs in one basket …
…
Great fear: Govt print money"
"This note is prepared to summarise today's meeting which was held with Tony to discuss and introduce the "Inner Circle" offering to David Rocker.
- In the current environment the portfolio would look to benefit from falling equity markets
- Not always different to the model
- Greater short term trading, more frequent transactions (but at £35 per trade only)
- Discretionary service with much more regular contact and access to the fund managers, client input taken on investment opportunities…
- Active management/technical analysis to assist trading style
- Larger weightings in opportunities identified compared to the model, backing judgement to deliver returns greater than the model
- Risk to be flexible dependent on view at the time i.e. could be 100% invested or 100% cash but likely to be medium/high in accordance with DR's risk profile
- …
- All investment asset classes to be considered, could be concentrated i.e. 75% commodity related.
DR's main concerns were:
- Cost/performance related fees…
- "Eggs in one basket" - DR is concerned about placing too much with us in the same strategy. Confirmed the IC would be different but a similar high level view on the relative value of asset classes. I reiterated regular contact and DR's views/opinions will also shape the strategy on an ongoing basis."
The file note also recorded an update of Mr Rocker's personal circumstances. Thus, whilst a number of items in Mr Robson's file note are closely reflected in Mr Marsh's manuscript note, there is no reference in the latter to consideration of Mr Rocker's risk profile or the risk profile of the IC Portfolio, as stated in Mr Robson's file note.
Letter 10 March 2009
"I think John summed it up when he said that the new service will be an alternative to cash on deposit, in that risk management will be central to the process with tight stop losses on all holdings, there with the upside provided by our fundamental and technical analysis, which will allow us to take advantage of a raft of different investment opportunities, perhaps trading more frequently than the model portfolio, but with brokerage charges of £35 per trade costs will not be a problem." (emphasis added)
"… The new service will be an alternative to cash on deposit, in that risk management will be central to the process with tight stop losses on all holdings,…"
The 2009 IC Agreement: contractual documents
(1) The Client Agreement
"1. Our agreement with you
1.1 Purpose of the terms
The purpose of these terms and conditions is to set out the basis upon which we agree to manage your portfolio of cash and investments.… The initial value and composition of your portfolio is set out in the attached Schedule.
1.2 The Agreement between us
The Investment management agreement between us comprises these terms and conditions and the terms and matters set out in the (Personal Review Questionnaire) (collectively referred to as "the Agreement"). We are authorised and regulated by the Financial Services Authority… (the "FSA"). For the purposes of the FSA Handbook of Rules and Guidance (the "FSA Rules") this is our client agreement with you.
1.5 Our regulator
…
- Unless agreed by us separately writing, we are treating you as a retail customer for the purposes of FSA Rules. This means that if permitted by the FSA Rules and by law, you will have all the protections given to retail clients by the FSA.
2. Our Investment management services and your overall investment objective
2.1 Investment classes
We will provide our investment management services in relation to the following investments:
- Shares in British and foreign companies, debenture stock, monies, currencies and loan stock, bonds, notes, certificates of deposit, commercial paper or other debt instruments including government, public agency, municipal and corporate issues, Eurobonds, fixed interest and other securities denominated in any currency, Treasury Bills and other money market instruments (referred collectively as "core investments").
- Unit trusts, open-ended investment companies, exchange-traded funds, mutual funds and other collective investment schemes in the UK and elsewhere, both regulated by the FSA and unregulated (in exercising our discretion on collective investment schemes constituting "packaged products" we base our advice on the whole market, or, as relevant, the whole of any sector of the market).
2.2 Options, futures and contracts for differences (derivatives)
- Where we think it appropriate we will deal on your behalf on a recognised or designated investment exchange and derivatives not involving contingent liability.
- If separately agreed in writing between us we will deal on your behalf in derivatives involving a contingent liability and off-exchange derivatives.
- You authorise us to debit your portfolio with sums required to pay or supplement deposit on margin in respect of derivatives transactions.
2.3 Your investment strategy and attitude to risk
We will provide our investment management services in line with the investment strategy (and attitude to risk inherent in that strategy) you have agreed as documented on our attitude to risk assessment.
2.4 Nature of investment objectives
Although we will exercise reasonable skill, care and diligence in attempting to achieve your investment objective, and selection of investments, changes in the value, or market conditions generally may prevent or hinder us from achieving the objective…
…
2.6 Instructions from you to effect transactions
We will, at our discretion, follow your instructions for specific investments to purchase for yourself from your portfolio. Any such instructions are processed on an execution only basis (i.e. no advice is provided) and we accept no liability for any inconsistency between the implementation of your instructions and your chosen investment objectives.
…
2.9 Benchmark
Unless agreed to the contrary with you, our aim is to out-perform the return your funds would have received if they had been invested in a bank account linked to the Bank of England base rate.
3. Specific controls on our discretion
In addition to tailoring our discretion in line with your chosen investment strategy, our management of your portfolio is also subject to the following controls:
3.1 Suitability
We have an obligation under the FSA rules not to affect or arrange a transaction with or for you unless the transaction is suitable for you and your portfolio, having regard to the facts disclosed by you and other relevant facts about you of which we are, or reasonably should be, aware.
3.2 Your instructions to us
We will comply with any instructions you provide regarding restrictions on the amount of, or type of, investment markets for investments.
…
7. Communicating with each other
…
7.5 Advice
We will provide advice to you in such a manner as we reasonably regard as appropriate or otherwise as we may agree. If you ask us we will explain the reasoning underlying any advice we give you regarding your investments and portfolios.
7.6 Our written acknowledgment
Once we have acted on instructions we will acknowledge it to you in writing, which may be by electronic means.
10. Matters we want to draw to your attention
In managing your portfolio (depending on your chosen investment strategy and instructions you provide to the contrary), we may purchase on your behalf investments to which certain risks apply.
We are keen to ensure that you understand the nature of these risks and the Risks Schedule contains an analysis of risks involved in:
Please read the Risks Schedule carefully and if any questions arise please raise them with your investment manager.
11. The extent of our responsibility for our actions and the actions of others
11.1 Our responsibility
We will carry out our duties with reasonable skill, care and diligence and in accordance with the instructions authority you have given us. As long as we do this, and save in circumstances caused by our fraud, negligence or wilful default, we cannot and do not accept any liability for loss (or the loss of an opportunity to gain) which arises from the exercise of our investment management for and on your behalf.
16. General
16.1 Amendments
- You must notify us in writing of any proposed amendments to the Agreement which will take effect only when accepted by us and we will notify you in writing as to whether we are prepared to accept proposed amendments or not.
- Amendments proposed by us will take effect on the date notified to you by us, which shall be a date not less than 10 business days after the date you receive a notice unless circumstances (such as legal or regulatory requirements) dictate a shorter period."
The Risks Warning Schedule
"This schedule is a very important document. It explains the risks involved in certain Investments that (depending on the Investment strategy that we have agreed with you) we may purchase for your portfolio.
The schedule contains an analysis of the risks involved in:
If you have any questions of or about the contents of this schedule please raise them with your Investment manager."
"We may advise you on, or undertake on your behalf, the purchase of securities forming part of investment companies (including investment trusts) may use gearing as an investment strategy. Gearing is the method by which the investment company may borrow against the investment fund in order to increase the size of the fund.
In considering advice, or our actions on your behalf, in relation to such securities you should be aware that:
(i) movements in the price of such securities may be more volatile than those in the underlying investments:
(ii) such securities and the underlying investments may be subject to sudden and large falls in value; and
(iii) you may get back nothing at all if there is a sufficiently large fall in the value of such securities."
(2) The Suitability Letter
"2. SUITABILITY
Your financial objectives are above average investment growth and capital protection. The investments we make under the account will be set with this aim. We believe this plan matches your risk profile.
Alternatives you might have considered and we have discussed include cash on deposit or alternative investment strategies.
3. FINANCIAL AND OTHER CIRCUMSTANCES
We have reviewed your overall financial circumstance and goals thoroughly.
It is clear that this recommendation is affordable out of available resources and that there are no other foreseeable calls on the funds committed to this recommendation either in the current circumstances or that can currently be anticipated.
…
5. INVESTMENT MANAGEMENT
The investment services that we provide comprise of very diligent ongoing work, on the following basis:
All investment holdings are constantly monitored. The purpose of this procedure is to ensure that, wherever possible, losses are not allowed to accumulate. This doesn't mean that from time to time any investment can't suffer a setback as there are times when an individual holding can be hit quite hard. However, diversification and stop loss protection reduces the risk of that kind of unexpected action excessively damaging the portfolio.
The process of limiting loss-makers is in itself a major step forward for any portfolio, because most portfolios simply work on a "buy and hold" process, so that although some of the holdings do make significant gains, other holdings are allowed to suffer significant losses. We do everything in our power to prevent the latter from happening. Thus, we provide a considerable benefit to the ongoing value of the portfolio.
The market is researched continually to identify new investment opportunities. The ongoing value of this work in all of its facets is specifically and absolutely targeted at achieving above average investment returns. We are one of the very few investment managers who genuinely monitor all holdings and generally search out new investment opportunities each and every day. The thoroughness of the work not only targets above average growth, but also lowers considerably the element of risk.
Fund growth will depend upon the performance of the underlying investments and these can go down as well as up. You should also be aware that future inflation may erode the buying power of your investment and your personal circumstances may change. The portfolio will not diversify to the extent found within a unit or investment trust.
You are however prepared to accept risks to target your financial goal of long-term investment growth for this portfolio.
…" (emphasis added)
Subsequent agreements relating to IC Portfolio: 2012 and 2013
(1) The 2012 IC Agreement
"Unless agreed to the contrary with you, our aim is to out perform the return your funds would have received if they had been invested in a bank account linked to the Bank of England Base Rate as represented by the UK 3 month cash total return index.
We also benchmark our returns to the APCIMS Balanced Portfolio index; this index is an industry standard asset allocated benchmark."
"Stop Losses
…
… we actively seek to ensure our clients' portfolios are protected against loss. That's why we monitor the markets so closely; to spot changing primary trends and move swiftly to reduce portfolio risk, and find investments with greater potential.
…
"2. Our discretionary investment management services
…
Depending on your chosen investment strategy we may purchase on your behalf investments to which specific risks attach. The Risk Schedule to the Client Agreement contains an analysis of the specific risk involved in the following investments."
It then set out the same list as in the 2009 IC Agreement (see paragraph 81 above) with the addition of "exchange traded products (to include structured products, exchange traded funds, exchange traded notes and exchange traded commodities)".
"Your Approach to Risk
Risk is potentially a highly complicated and subjective area and there are many possible ways of approaching risk management. We employ a number of techniques (diversification, stop loss alerts and hedging techniques). The management of risk is one of the key roles of an investment manager.
As part of the service we provide we are keen to ensure that the risk profile of your portfolio is suitable to your aims and needs as you have expressed them to us.
…
Full Circle utilise the FinaMetrica Risk Profiling system …
You have completed the Risk Profiling Questionnaire which has provided the following result:
Your estimated score: 55
Your actual score: 57
To achieve your aims and needs we will usually seek to achieve some balance between risk and return. This means that your portfolio may contain holdings with a higher or lower risk profile than you would be comfortable with as a stand-alone investment, but when combined and considered with the other holdings form an effective portfolio meeting your risk criteria. Consequently, should the circumstances and risk level of an individual investment change, it does not necessarily follow that it should be sold immediately, as it should still be viewed in the context of the whole portfolio.
Risk Categories
The categorisation of risk necessarily has subjective elements, but to help you express the level of risk you are willing to accept in your portfolio, we have defined three broad categories of risk.
Please indicate your preferred level of risk, by ticking one box:
…"
Mr Rocker then ticked the box entitled "Balanced (Medium Risk)" which was defined as follows:
"Risk asset exposure will be taken through the full range of the major asset classes being equities (both long and short), fixed interest, property, and alternatives such as commodities, precious metals, currencies and hedge funds. The portfolio would have an expected return in excess of cash on deposit but has the capacity to suffer loss. The risk rating band of the portfolio is within a range of 3.5-6.5 (out of 10) and is suitable for those with a FinaMetrica risk score between 40-65."
By way of contrast, the definition of "Aggressive (High Risk)" provided for a portfolio risk rating band of 7-10 and a customer risk profile score of 60-85. As regards FCAM's customer risk profile bands, there is an overlap (or "crossover") where the score was between 60 and 65. On the other hand, FCAM's bands for portfolio risk not only do not overlap, but in fact there is a gap, between 6.5 and 7. On any view, a FinaMetrica score of 57, does not approach the overlap area.
"Your overall objectives and risk tolerance have been assessed above. These are known as the "Client Risk Profile". However you may wish to select different objectives and tolerances for specific investable assets, this is known as the "Portfolio Risk Profile". This should be discussed with your adviser and summarised below:…"
The Questionnaire was then completed in manuscript recording that, for the Model Portfolio, the Portfolio Risk Category was "medium", whilst for the IC Portfolio the Portfolio Risk category was "medium/high". The form then continued:
"If the specific objectives and/or risk categories differ to your overall client risk profile please summarise the reasons and rationale below,
Comments/additional information:
[then in manuscript] A greater degree of risk is intended and accepted for [the IC Portfolio]. However market conditions and discussion with the fund managers will mean that the risk of the portfolio will fluctuate between medium and high risk.
[The Model Portfolio] is to be maintained as medium as per the assessed risk profile and invested in accordance with the core model portfolio."
"The IC account risk score does fluctuate which will continue according to DR's ongoing discussions with JR around positioning and strategy. JR reiterated that the IC account, if fully invested, is likely to be in the high risk range. DR agreed to maintain."
In his witness statement, Mr Rocker said that he did not believe that Mr Robson made that assertion at the meeting.
"… The purpose of [the first part of the meeting] was to discuss anew your attitude to risk and to complete the FinaMetrica questionnaire, our investment questionnaire and updated client agreement. It is important that periodically these matters are discussed afresh, because circumstances do change.
A copy of the FinaMetrica questionnaire is enclosed with this letter.…… the final score was confirmed as 57, which is higher than average and puts you in the crossover area: the high end of medium and low end of high.…".
(2) The 2013 IC Agreement
"we will provide our Investment management services in line with the investment strategy (and attitude to risk inherent in that strategy) you have agreed as documented on our investment questionnaire or attitude to investment risk document".
(F) FSA investigation under s.166 FSMA
(G) The Issues
Issue (1): Contractual Terms, Strategy and Risk
(1) The 2009 IC Agreement was made wholly in writing and comprises three documents: the Client Agreement, the Custodian Form and the Suitability Letter. Further the 2005 ATR Document is a contractual document under the 2009 IC Agreement, being the documented attitude to risk assessment referred to in clause 2.3 of the Client Agreement.
(2) There was no agreed investment strategy under the 2009 IC Agreement. Whilst Mr Rocker supported the strategy, he did not agree to it. It was never expressly put to Mr Rocker in cross-examination that he had "agreed" to the investment strategy, and further such a strategy was in conflict with the contractually agreed desire to preserve capital. The "investment objective" was to be found in the 2005 ATR Document.
(3) For the initial period of his IC Portfolio, up to June 2012, Mr Rocker's customer risk profile (or attitude to risk ("ATR")) and the portfolio risk profile were both "medium". This is established by the 2005 ATR Document. Further, and in any event FCAM has admitted this and, by reason of the order of Deputy Master Leslie dated 4 November 2016 refusing permission to withdraw that admission, FCAM is precluded from contending otherwise.
(1) The 2009 IC Agreement was made partly in writing and partly orally. The part made in writing comprised the Client Agreement and the Custodian Form. The Suitability Letter was not a contractual document, but merely a description of what FCAM would do. As regards the part of the Agreement made orally, strategy and risk were agreed orally in January and March 2009 and evidenced in writing, most particularly in the 9 March file note made by Mr Robson referring, in particular, to the issue of customer and portfolio risk profile.
(2) Mr Rocker and FCAM agreed to the investment strategy for the IC Portfolio. That strategy was agreed orally, and as evidenced in writing in the 9 March file note and elsewhere. The strategy was to invest in "bear products", in order to take advantage of falling equity markets.
(3) For the initial period for the IC Portfolio, Mr Rocker's customer risk profile (or ATR) was "upper end of medium". For that same period, the portfolio risk profile of the IC Portfolio was "medium but flexible". This is based on what was agreed between January and May 2009. "Medium but flexible" means that, depending on particular opportunities, the risk level of medium could be exceeded, as long as it was generally a medium risk profile. Such flexibility did not require the client's consent each time it was "flexed", but where a particular opportunity which would increase the risk of the portfolio was expressly raised with Mr Rocker and/or his consent obtained, there can be no doubt that this was in accordance with the "medium flexible" risk profile.
(a) The content of the 2009 IC Agreement
(1) In my judgment, the Client Agreement and the Custodian Form are contractual documents, forming part of the 2009 IC Agreement. Further, I consider that the Suitability Letter does contain contractually binding terms and representations and also forms part of the 2009 IC Agreement. It was sent as one of three formal documents evidencing the conclusion of the 2009 IC Agreement. The covering letter refers to it, in the context of Mr Rocker's acceptance of the invitation to join the Inner Circle, as forming, together with the other two documents (which are indisputably contractual) part of the relevant "documentation" - see the words "with the above in mind". Apart from the need to sign, no distinction is made between the three documents. Furthermore, the Suitability Letter contains matters of contractual promise or obligation. By its own terms, it is written as being "an invitation" to join the IC Portfolio, and whilst it refers to "acceptance of the invitation" conditionally, by the time that it was sent to and received by Mr Rocker, that invitation had been accepted. The contents of the Letter are therefore some of the terms upon which that invitation has been made and accepted. Significantly, the Client Agreement (at clause 2.4) refers to Mr Rocker's "investment objectives" but does not go on to state what those objectives are. Rather, it is at clause 2 of the Suitability Letter and there alone, that the documentation provided to Mr Rocker records his relevant investment objective: namely "average investment growth and capital protection" and a promise to make the investments with that aim. (I do not accept that the investment objectives of the IC Portfolio are to be found in the 2005 ATR Document, for the reasons set out in (3) below). The Suitability Letter contains further terms as to how FCAM will perform the service (for example using the services of Charles Stanley). Express reference was once again made to the importance of "tight stop losses", which as I find below was a representation amounting to a contractual term. Set against all these features, the fact that the Suitability Letter was not required to be, and was not, signed and returned, is not relevant.
(2) Nevertheless, I agree with FCAM that the 2009 IC Agreement was not made wholly in writing, but that some of its terms were agreed orally and evidenced in writing. Most particularly I consider that the contractual strategy and risk were effectively agreed orally. Further, as explained below, I also consider that oral, and written representations, in relation to stop losses, made prior to the conclusion of the Agreement were incorporated as terms of the Agreement.
(3) I do not consider that the 2005 ATR Document is, for the purposes of the 2009 IC Agreement, a contractual document or the contractual document referred to at clause 2.3 of the Client Agreement. First it was a document prepared in 2005 well over three years earlier. Secondly, the 2005 ATR Document does not contain any reference to "investment strategy", as stated in clause 2.3. In any event, insofar as the 2005 ATR Document addresses strategy at all it plainly deals with the strategy relating to the Model Portfolio. The strategy and/or objectives of the Model Portfolio, on the one hand, and the IC Portfolio, on the other, were, it was accepted by Mr Rocker, somewhat different.
(4) Accordingly, in my judgment, the "documented attitude to risk assessment" referred to in clause 2.3 does not exist as such. Nevertheless I do not accept that as a consequence, there was no agreed risk profile nor any agreed strategy at all. These were agreed orally as I explain in the following paragraphs.
(b) Agreed investment strategy
(c) The agreed customer and portfolio risk profile
(i) The application to amend the Defence: Decision of Deputy Master Leslie 2 November 2016
The original pleadings
(§5.2) "initially [the Claimant] described his risk appetite as "medium risk" but this was later upgraded to "medium/high risk" or "balanced/aggressive". Throughout its life the investments within the Inner Circle Portfolio were consistent with these risk appetites."
(§13.1) "At all material times, the risk category of the overall Inner Circle Portfolio was "medium risk". While the Inner Circle Portfolio did at times contain assets that might be categorised as higher than "medium risk", it also contained assets that were lower than "medium risk". A "medium risk" portfolio can be constituted by a blend of lower and higher risk investments, as is recognised by industry convention."
(§14.12) "On 12 June 2012 .. Mr Robson reiterated that … the overall risk profile of the Inner Circle Portfolio was likely to go above "medium risk"..
(§22.1) "The investments… were structured… with a view to maintaining the claimant's assessed and pre-assessed risk tolerance of: from 12 May 2009, "medium risk"; from 11 June 2012 , "medium/high risk"… ;"
Further, at§10, FCAM expressly averred that Mr Rocker's attitude to risk "for the purposes of clause 2.3 of the [Client] Agreement" had previously been established as "medium risk" in the 2005 ATR Document.
(§34.3) "As to paragraph 7 … the Inner Circle Portfolio had a flexible risk classification which was documented as alleged by the claimant"
(§40) "Paragraph 13 is admitted save that the risk level was from the inception of the Inner Circle Portfolio intended by the parties to be flexible"
I make the following observations on these two subparagraphs. First, I do not consider that the allegation in §34.3 is an allegation that the customer or portfolio risk profile for the first period (i.e. up to June 2012) was "flexible" or "medium but flexible". Rather it is an indication of an acceptance of the change of risk classification that occurred in June 2012, as pleaded specifically in §7 of the Particulars of Claim. Secondly, §40 is referring to portfolio risk (and not customer risk). It could be argued that it was intended to reflect the point made in §13.1 of the Particulars of Claim about a medium risk portfolio containing a blend of assets with lower or higher risk categories.
The application to amend the Defence
The decision of Deputy Master Leslie
The effect of the decision of Deputy Master Leslie
(ii) What was agreed as to customer risk profile and portfolio risk profile
Conclusion
Issue (2): Breach of Mandate
(1) What is the appropriate numerical value to be given to an investment portfolio with a "medium" risk profile? In particular:
(a) Is it appropriate to include a tolerance of +/- 0.5 at each end of the numerical range? ("tolerance")?
(b) To what extent is it permissible for the upper limit of the risk band for a medium risk profile portfolio to be exceeded without thereby constituting a breach of mandate? ("flexing")?
(2) Was Mr Rocker's IC Portfolio "risk scored" contemporaneously during the period when he was invested in the Portfolio?
(3) The risk scores to be ascribed to individual assets within Mr Rocker's IC Portfolio.
(4) In reaching a risk score for the overall portfolio, from time to time, what, if any, adjustment to the scores should be made for:
(a) Diversification of assets (or lack of it) within the portfolio;
(b) Netting off risk scores of particular assets against each other, on the basis that they "hedge" where they are "inversely correlated" ("netting" or "net risk scoring")?
(5) What were the overall risk scores for Mr Rocker's IC Portfolio over the relevant period?
Before turning to each of these issues in turn, I set out the background to these issues and make some overriding observations.
General
(1) Numerical scores, tolerance and flexing
(2) The actual risk scoring process
(3) Risk scores for Individual Assets
(1) In some cases Dr Walford's asset classification was different from that of FCAM. For example in two cases, he classified an asset as Gold/Gold mining or Gold/EM Bear, where FCAM classified it as Gold bullion. (This included one of the two "remaining" assets where his score was higher by more than 0.5). His evidence as to why he had not checked these classifications was not very clear and in any event he concluded by saying that he was not concerned that his scoring "was slightly different at the margin because inevitably different people will have different risk scores associated with different investments" (8/72/16-19).
(2) Dr Walford used a flat score of 7.5 for equities (and this accounted for 3 cases where his score was higher than that of FCAM). FCAM initially scored equities at 5 and Kinetic, at §5.30 of the s.166 Report, did not disagree with that as the base line risk. Mr Goodyer considered that FCAM's approach was not unreasonable. At §26.3 of the Joint Memorandum, Mr Goodyer considered that 7.5 for equities was without foundation and that he had never seen that level of rating for all UK equities. In fact in the revised Appendix 42 FCAM scored equities at 6, rather than 5. In cross-examination (8/77/8-8/79/6) Dr Walford maintained his view that 7.5 was the correct score, explaining that it was based on the FinaMetrica own statement that a portfolio invested 100% in equities was in the high risk band, of 7-10, and thus individual equities must necessarily have a score within that band. Whilst there is some logic in that reasoning, nevertheless the cases where there was a significant difference between Dr Walford and FCAM on this ground all fell within the 9 cases which together made up less than 5% of the value (see paragraph 169 above).
(3) Finally, Dr Walford scored bear instruments as a higher risk, and in some cases because the risk was increased through gearing. At §7.3 of his first report he identified one such asset and in answers to Part 35 questions, he identified a further 8 assets as falling into this category. FCAM contends that, in some cases, Dr Walford did not properly consider the actual risk involved in bear instruments which were only geared to the downside of the index. In such a case, whilst the opportunity for profit was geared, the risk of loss was not geared, but was rather one to one. In cross-examination, whilst he explained that the position was complex, depending on the strike price, Dr Walford nevertheless accepted that an asset which is geared both to the downside and upside is much more risky than one which is geared to the downside only (8/94/10 to 8/95/2). He had assumed that each of the leveraged bear instruments had risk on both sides, whereas FCAM had assessed the risk on the assumption that it had been acquired at the strike price. I accept FCAM's point here that Dr Walford had not considered in detail the consequences of these assets being geared to one side only, when including them at a higher score, although there was substance to his point about the strike price. In any event, in my judgment, in many of these cases, the difference in risk score, if any, was small and in the one case where it was greater than 1, in my judgment, taking into account those cases where FCAM scored higher, the overall effect on the overall gross risk score is likely to have been minimal.
(4) Diversification and Netting
Diversification
Netting
"The Blackrock Gold and General and RBS Zero Leveraged Bear are uncorrelated, but not a perfect hedge, even though their weightings at 17.2% and 16.4% are similar. There would be a high element offset with regards to downside risk.
FCAM calculated the weighted net ICP risk score, after offsetting between Blackrock Gold and General and FTSE Zero at 4.84"
"The first is that FCAM only net risk Equity against Equity bear, not Gold V Equities as TW describes. Secondly there are multiple net risking bases and possibilities as I shall explain below."
Conclusions on netting
(1) The net risk scoring in Appendix 42 was carried out by FCAM and not by Mr Goodyer.
(2) It is common ground that you can offset a risk score only where assets are inversely correlated assets. Mr Goodyer's approach that netting can be wider and can extend to assets which are "uncorrelated" was not sufficiently clear or cogent to be relied upon.
(3) The burden of proof in relation to this issue lies with FCAM, but it has adduced evidence to discharge the evidential burden. What was done by FCAM by way of netting in Appendix 42, following the methodology in paragraph 10 of Appendix 41, was confined to inversely correlated assets.
(4) In my judgment, FCAM, having put forward Appendix 42 as evidence, there was an evidential burden upon Mr Rocker to demonstrate that Appendix 42 was wrong. Mr Rocker, and in particular Dr Walford has not shown that netting off was not confined to inversely correlated assets. Dr Walford did not carry out his own netting exercise and in my judgment he is wrong when criticising the netting of Blackrock Gold - when he said it was gold v. equity and not equity themed long vs. equity bear.
(5) I accept the netting carried out in Appendix 42.
(5) Actual Scores
Issue (3): Performance Benchmark
"A firm that manages investments for a client must establish an appropriate method of evaluation and comparison such as a meaningful benchmark, based on the investment objectives of the client and the types of designated investments included in the client portfolio, so as to enable the client to assess the firm's performance." (emphasis added)
Whilst this does suggest that the benchmark should be selected by reference, inter alia, to the investments within a portfolio, it remains nevertheless a provision which requires evaluation of performance of a portfolio by reference to the benchmark, and does not prescribe the allocation of assets within a portfolio.
Issue (4): Stop Loss
(1) Was FCAM under a legal obligation to operate a system of "stop loss" protection in respect of Mr Rocker's IC Portfolio?
(2) If so, what was the meaning and content of that "stop loss" obligation?
(3) Did FCAM fail properly to operate the system of "stop loss" protection?
(1) Was there a contractual obligation to operate a "stop loss" system/policy?
The parties' contentions
(1) It was an express term of the 2009 IC Agreement that FCAM would operate a "stop loss" policy seeking to protect the IC Portfolio against loss by the use of "aggressive" or "tight" stop losses. That express term was contained in clause 5 of the Suitability Letter, forming part of the 2009 IC Agreement.
(2) Alternatively, there was an implied term of the 2009 IC Agreement to the same effect.
(3) Alternatively, by reason of pre-contractual statements made by FCAM, there was an obligation upon FCAM to the same effect which arose by reason of a representation relied upon by Mr Rocker in entering, and/or by reason of a collateral warranty (or contract) which induced Mr Rocker to enter, into the 2009 IC Agreement.
(1) There was no express term of the 2009 IC Agreement to that effect. The Suitability Letter is not a contractual document at all and therefore does not contain any of the terms of the 2009 IC Agreement. In any event clause 5 of the Suitability Letter does not impose any obligation.
(2) A term to such effect is not necessary to give business efficacy to the Agreement nor is it so obvious that it goes without saying and so cannot be implied into the 2009 IC Agreement.
(3) There was no representation made by FCAM that "stop losses" would be operated in the manner for which Mr Rocker contends. Further and in any event Mr Rocker cannot establish that he relied upon any such representation when entering into the 2009 IC Agreement nor that any "collateral warranty" induced him to do so.
Analysis
Express Term, Representation and Collateral Contract
Implied Term
(2) The meaning of "stop loss"
The parties' contentions
(1) Various dictionary definitions of the term "stop loss" all support this construction.
(2) "Stop loss" is a technical term upon which expert evidence is admissible. The evidence of Dr Walford supports this construction and is to be preferred to the evidence of Mr Goodyer.
(3) Case law, such as it is, points to this meaning of the term.
(4) There is no evidence to support the alternative meaning of the term put forward by FCAM nor that that meaning was ever explained by FCAM to Mr Rocker.
(5) A substantial number of documents in the course of correspondence between FCAM and Mr Rocker all point towards the meaning of the term contended for by Mr Rocker.
(6) Finally, "aggressive" or "tight" stop losses meant that the stop loss level would be set at a 5% reduction in the value of the investment (i.e. 95% of its acquisition price).
Relevant legal principles
(1) The interpretation of a contract, and of the words used in a contract, is an objective exercise. The question is what a reasonable person in the position of the parties would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text and its relevant context: Lewison §2.03.
(2) The relevant context includes the facts known to the parties at the time, including the surrounding circumstances and the purpose and object of the transaction. Evidence as to these matters is admissible. Lewison §2.03
(3) Consistently with this approach, the subjective intention of the parties, even if communicated to the other party is not relevant, and direct evidence of what the parties actually intended by the words is not generally admissible. Thus in this case, Mr Rocker's or Mr Selsby's evidence as to their understanding of the term "stop losses" as used in the 2009 IC Agreement is not admissible.
(4) In general, the Court may look at dictionaries in order to elucidate the meaning of words used. A dictionary is a guide to which the Court may have regard as an aid to construction to ascertain the meaning of words in their relevant context. It is part, albeit part only, of the material available to the Court: Lewison §5.03 It follows that a court may ascribe to words a meaning not found in the dictionary.
(5) Where a document contains technical terms which the court does not understand, the court may discover the meaning of such terms through the use of an appropriate dictionary, unless the meaning of the term is in dispute, in which case the court can only proceed upon evidence: Lewison 5.07 statement of principle as subsequently approved, inter alia, in Kellogg Brown & Root Inc v Concordia Maritime AG [2006] EWHC 3358. A "technical term" or "expression" includes any non-legal term of art, not used in ordinary speech - it is not confined to scientific or engineering terms. In this context, the Court may consider extrinsic evidence from a witness experienced in the field. Such evidence is admissible as part of the relevant background, and it is admissible even if the meaning falls short of a trade custom: Lewison, supra, p255 referring to Lloyds TSB Bank plc v Clarke [2002] UKPC 27 and Crema v Cenkos Securities plc [2011] Bus LR 943.
(6) Whilst it may be that where the Court is considering a "technical" term (rather than "ordinary words"), then the Court should consider "evidence" rather than dictionaries, the distinction between ordinary and technical terms is not always clear: Sussex Investments Ltd v Secretary of State for the Environment [1998] PLCR 172 at 180.
(7) Where a word has a customary meaning in a particular trade or among a particular class of person, evidence is admissible to show that the parties intended to give the word that meaning. This principle overlaps with the principle in relation to non-legal technical terms (in (5) above) and it is not always easy to distinguish between "technical terms" and "trade usage". However if a word or phrase does not have customary meaning in a particular trade, no assistance is gained from admitting evidence from those practising in the industry. Further, in this regard, case law may be referred to where a trade usage is particularly notorious.
Analysis
(1) Dictionaries
"an advance order to sell an asset when it reaches a particular price point. It is used to limit loss or gain in a trade. The concept can be used for short-term as well as long-term trading. This is an automatic order that an investor places with the broker/agent by paying a certain amount of brokerage. Stop loss is also known as "stop order" or "stop-market order". By placing a stop loss order, the investor instructs the broker/agent to sell a security when it reaches a pre-set price limit."
(2) Cases
(3) Expert evidence
"Q: Now, I think we all have your thesis, Mr Goodyer… about stop losses and stop alerts and the terms being used, you say, interchangeably. Is that right?
A: Interchangeable? No, I always see stop losses as alerts. They're not interchangeable. It's either a stop loss where is we will apply a stop loss, your Honour, and when that stop loss is hit we will apply that stop loss and do a trade or it is an alert."
So at that point he denied that "stop loss" and "alert" mean the same thing. They are not interchangeable they are different. However his evidence continued:
"Q: So that I understand your evidence, you don't disagree with Dr Walford the term stop loss means if you hit the trigger figure, the investment is to be sold unless overridden?
A: No, I don't agree with Dr Walford at all on this, your Honour. In my opinion, stop losses are alerts. If I was trading as an investment manager today, I would set up, as FCAM do stop losses on their systems, internal systems… that when a certain level that you have pre-set has been hit, that fires off an alert. That is a stop loss, in my opinion"
…
Q: So if you can help me: in your lexicon, Mr Goodyer –
A: My lexicon yes.
Q: In your dictionary, what is the difference between your concept of a stop loss and your concept of a stop alert?
A: They are one and the same.
…
Q: If I think as you've described it, a stop loss in your language, that's a stop alert, they're one and the same, a stop alert loss system doesn't itself protect against loss, does it?
A: No. It alerts you to the potential loss"
Further in his evidence he used the terms "stop loss", "alert" "stop alert" and "stop loss alert" without clear distinction. For example (9/181/21 to 9/182/7):
"A: As I have said to you, I've given you my view of what I understand a stop alert to be, my Lord – a stop loss alert to be.…
This isn't clear, but the fact that stop losses, as in alerts, were being activated clearly, I think, has been shown within various correspondence to have happened."
(4) The parties' evidence
(5) Other relevant background at the time of contracting
(6) The Model Portfolio: Clause 7 and its operation
Conclusion on meaning of "stop loss"
(3) Failure to operate the "stop loss" policy
Issue (5) : The regulatory case: breach of COBS
(1) Failure to obtain information from Mr Rocker and assess the suitability of the IC Portfolio and/or its underlying investments;
(2) Failure to provide sufficient information to Mr Rocker about the investments and the investment strategy;
(3) Failure to keep adequate records.
(1) Failure to obtain information from Mr Rocker and assess suitability
"Assessing suitability: the obligations
9.2.1
(1) A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client.
(2) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client's:
(a) knowledge and experience in the investment field relevant to the specific type of designated investment or service; [see further 9.2.2(1)(c) and 9.2.3]
(b) financial situation [see further 9.2.2(1)(b) and 9.2.2(3)]; and
(c) investment objectives [see further 9.2.2.(1)(a) and 9.2.2(2)] ;
so as to enable the firm to make the recommendation, or take the decision, which is suitable for him."
COBS 9.2.1 is expanded upon in 9.2.2 and 9.2.3.
"9.2.2
(1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:
(a) meets his investment objectives;
(b) is such that he is able financially to bear any related investment risks consistent with his investment objective; and
(c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.
(2) The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile and the purposes of the investment.
(3) The information regarding the financial situation of a client must include, where relevant, informational on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments.
9.2.3
The information regarding a client's knowledge and experience in the investment field includes, to the extent appropriate to the nature of the client, the nature and extent of the service to be provided and the type of product or transaction envisaged, including their complexity and the risks involved, information on:
(1) the types of service, transaction and designated investment with which the client is familiar;
(2) the nature, volume, frequency of the client's transactions in designated investment in the period over which they have been carried out;
(3) the level of education, professional relevant former profession of the client.
…" (emphasis added)
Then under the heading "insufficient information", COB 9.2 continues
"9.2.6
If a firm does not obtain the necessary information to assess suitability, it must not make a personal recommendation to the client or take a decision to trade for him.
9.2.7
Although a firm may not be permitted to make a personal recommendation or take a decision to trade because it does not have the necessary information, its client may still ask the firm to provide another service such as, for example, to arrange a deal or to deal as agent for the client. If this happens, the firm should ensure that it receives written confirmation of instructions.…"
"9.3.1
(1) A transaction may be unsuitable for a client because of the risks of the designated investments involved, the type of transaction, the characteristics of the order or the frequency of the trading.
(2) In the case of managing investments, a transaction might also be unsuitable if it would result in an unsuitable portfolio."
(2) Failure to provide sufficient information about strategy and risks
"2.2.1
(1) A firm must provide appropriate information in a comprehensible form to client about:
(a) the firm and its services;
(b) designated investments and proposed investment strategies; including appropriate guidance on and warnings of the risks associated with investments in those designated investments or in respect of particular investment strategies;
(c) execution venues; and
(d) costs and associated charges;
so that the client is reasonably able to understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to take investment decisions on an informed basis.
(2) That information may be provided in a standardised format."
"4.5.2
A firm must ensure that information:
(1) includes the name of the firm;
(2) is accurate and in particular does not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and public indication of any relevant risks;
(3) 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 received; and
(4) does not disguise, diminish or obscure important items, statements or warnings.
…
4.5.4
In deciding whether, and how, to communicate information to a particular target audience, a firm should take into account the nature of the product or business, the risks involved, the client's commitment, the likely information needs of the average recipient and the role of the information in the sales process.
4.5.5
When communicating information, a firm should consider whether omission of any relevant fact will result in information being insufficient, unclear, unfair or misleading."
"14.3.2
A firm must provide a client with a general description of the nature and risks of designated investments, taking into account, in particular the client's categorisation as a retail client or a professional client. That description must:
(1) explain the nature of the specific type of designated investment concerned, as well as the risks particular to that specific type of designated investment, in sufficient detail to enable the client to take investment decisions on an informed basis; and
(2) include, where relevant to the specific type of designated investment concerned and the status and level of knowledge of the client, the following elements:
(a) the risks associated with that type of designated investment including an explanation of leverage and its effects and the risk of losing the entire investment;
(b) the volatility of the price of designated investments and any limitations on the available market for such investments;
(c) the fact that an investor might assume, as a result of transactions in such designated investments, financial commitments and other additional obligations, including contingent liabilities, additional to the cost of acquiring the designated investments; and
(d) any margin requirements or similar obligations, applicable to designated investments of that type."
…
14.3.6
(1) A firm need not treat each of several transactions in respect of the same type of financial instrument as a new or different service and so does not need to comply with the provision rules (COBS 14.3.2 to COBS 14.3.5) relation to each transaction.
(2) But a firm should ensure that the client has received all relevant information in relation to a transaction, such as details of product charges that differ from those already disclosed.
…"
Under the heading "the timing rules":
"14.3.9
(1) The information to be provided in accordance with the rules in this section must be provided in good time before a firm carries on designated investment business or ancillary services with or for a retail client.
…" (emphasis added)
(3) Failure to keep adequate records
"9.5.2
A firm must retain its record relating to suitability for a minimum of the following periods…
(4) in any other case, three years"
Conclusion
Issue (6): Loss: causation and quantum
(1) Breach of mandate: £573,229.40;
(2) Stop Loss damages: £154,967.60 (period 2) + £213,045.46 (period 1);
(3) Opportunity loss: £861,182.
(1) What loss, if any, did Mr Rocker sustain arising from the breach of the medium risk mandate in period 1?
(2) What additional loss, if any, did Mr Rocker sustain arising from the breach of FCAM's stop loss obligations both in period 1 and from June 2012 to 21 March 2014 ("period 2")?
(3) Is Mr Rocker entitled to claim damages for opportunity loss, and if so, what amount?
General points
"On the one hand, the general rule that the burden lies on the claimant to prove its case applies to proof of loss just as it does to the other elements of the claimant's cause of action. But on the other hand, the attempt to estimate what benefit the claimant has lost as a result of the defendant's breach of contract or other wrong can sometimes involve considerable uncertainty; and courts will do the best they can not to allow difficulty of estimation to deprive the claimant of a remedy, particularly where that difficulty is itself the result of the defendant's wrongdoing. … Accordingly the court will attempt so far as it reasonably can to assess the claimant's loss even where precise calculation is impossible. The court is aided in this task by what may be called the principle of reasonable assumptions – namely, that it is fair to resolve uncertainties about what would have happened but for the defendant's wrongdoing by making reasonable assumptions which err if anything on the side of generosity to the claimant where it is the defendant's wrongdoing which has created those uncertainties."
Where quantification involves a hypothetical exercise, the court does not apply a balance of probability approach, but estimates the loss by making the best attempt to evaluate the chances: see UBS AG (London Branch) v Kommunale Wasserwerke Leipzig Gmbh [2017] EWCA Civ 1567 at §284 (citing Parabola Investments Ltd v Browallia Cal Ltd [2010] EWCA Civ 486).
(1) Breach of mandate
(2) Stop Losses
"Any attempt to do this will bring in a whole new set of variables (such as what is done with the realised cash) which, in my opinion, makes the calculation meaningless"
(3) Opportunity loss
Conclusions
(1) In the initial period up to June 2012, Mr Rocker's customer risk profile was "medium" and the portfolio risk profile of the IC Portfolio was also "medium". As a result of the order and ruling of Deputy Master Leslie made in November 2016, FCAM is precluded from contending to the contrary, and secondly, and in any event, I do not accept that it was agreed that the customer risk profile was "upper end of medium" nor that the portfolio risk profile was "medium but flexible" (paragraphs 120, 140 to 142 above).
(2) In periods up to June 2012, the actual risk profile of the IC Portfolio exceeded the agreed portfolio risk profile, with a maximum risk score of 6.5, and FCAM thereby acted in breach of mandate, in breach of clause 2.3 and 3.1 of the 2009 Client Agreement and/or COBS 9.3.1 (paragraph 211 above).
(3) FCAM did not breach its obligations under the IC Agreements and/or COBS in relation to the performance benchmark (paragraphs 212 to 218 above).
(4) FCAM acted in breach of its contractual obligation to operate a stop loss policy under which it was required automatically to sell any investment if that investment made a loss of 5% (paragraphs 263 and 265 above).
(5) FCAM acted in breach of certain provisions of COBS. These breaches do not add to the breach of contractual mandate or did not cause separate loss. Otherwise, FCAM did not act in breach of its obligations under COBS 2.2, 4.5.2, 9.2 and 14.3.2 (paragraphs 290 and 291 above).
(6) Mr Rocker is entitled to damages for loss caused by breach of mandate and failure to operate the stop loss policy. He is not entitled to damages for opportunity loss (paragraphs 299, 308 and 310 above).