A victory for financial services firms who play by the rules
In the recent case of Michael Duthie Wilson, PS Trustees Ltd v MF Global UK Limited, GNI Limited (In Members' Voluntary Liquidation) [2011] EWHC 138 (QB) it was held that financial investment brokers had complied with the COB rules when the Claimants as 'intermediate customers' and were not liable for trading losses suffered by them.
Wilson was a businessman and trustee of a company pension scheme of which PS Trustees was a corporate co-trustee. They had 'execution only' accounts with the Defendants through which Wilson conducted short term trades in CFDs, futures and options. The Claimants suffered losses and claimed that, despite the execution only status, they had relied on the Defendants' advice regarding general strategy and particular trading transactions.
Except for one account, the Claimants argued that (i) they had been mis-classified as 'intermediate customers' rather than 'private customers' under COB 4.1.4R and COB 4.1.9R which would have afforded them a higher level of regulatory protection under COB 5.3.5R and COB 5.4.3R; and (ii) the Defendants were under an obligation to advise on suitability and risks regarding the CFDs and futures and options accounts which, in practice, they had done anyway.
Eady J rejected all of the Claimants' allegations. With regard to the classification, the test laid down in Spreadex Ltd v Sekhon [2008] EWHC 1136 (Ch) was followed, namely, whether reasonable care had been taken by the Defendants to determine that the Claimants had sufficient experience and understanding to be classified under COB 4.1.9R. It was held that it was appropriate for the Court to have regard to COB 4.1.10G and whether the Defendants had complied with the procedural steps set out in COB 4.1.9(1)R. Eady J was of the opinion that the Defendants had complied with these requirements by carefully designing a system to convey warnings and elicit information from the potential customer. The Defendants' system provided a framework for ensuring that reasonable care was taken and for recording the outcome. It was held that the Defendants were entitled to rely on the information provided by a client on account opening forms for the purpose of customer classification. Furthermore, Wilson had provided a written consent to the classification.
In relation to the advisory claim, Eady J emphasised that the Claimants' accounts were opened on an 'execution-only' basis designed so that Wilson could implement his own investment strategy. Therefore there was no duty on the Defendants to advise. Eady J considered any reasonable client in Wilson's position would have concluded, if he had read the contracts, that he was not being given advice on the merits of particular transaction and any information or opinions offered were purely incidental to the dealing relationship.
The common law claims were also rejected. Eady J referred to Redmayne Bentley Stockbrokers v Isaacs [2010] EWHC 1504 and held that there was no basis to imply an obligation to comply with the applicable COB rules since that obligation was imposed by statute. As to the breach of duty of care argument, it was held that expressing views about the market or particular opportunities did not constitute assuming responsibility as an investment adviser (JP Morgan Chase Bank and others v Springwell Navigation Corporation [2010] EWCA Civ 1221).
The High Court decision will be welcomed by financial services firms. Whilst each individual case will turn on its facts, the Court has recognised that it should have regard to the relevant conduct of business rules and guidance laid down by the FSA when determining whether a financial services firm has complied with client classification requirements.
It is indicative of the speed of litigation that this judgment relates to the pre-MiFID (pre November 2007) Conduct of Business Rules. The current COBS rules include a 'quantitative test' (COBS3.5.3(2)) which would now make the classification more onerous
The Court also acknowledged that it is possible for a financial services firm to provide some advice or recommendation without it constituting an advisory relationship and, in turn, being potentially liable for any losses suffered by its clients.