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||Neutral Citation Number:  EWHC 138 (QB)
||Case No: HQ09X01868
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
||Royal Courts of Justice
Strand, London, WC2A 2LL
||1 February 2011
B e f o r e :
THE HONOURABLE MR JUSTICE EADY
|| (1) MICHAEL DUTHIE WILSON
(2) PS TRUSTEES LIMITED
||- and -
||(1) MF GLOBAL UK LIMITED
(2) GNI LIMITED (In Members' Voluntary Liquidation)
Jalil Asif QC (instructed by Finers Stephens Innocent LLP) for the Claimants
Jamie Smith (instructed by Clifford Chance LLP) for the Defendants
Hearing dates: 30 November, 2-3 December, 6-10 December, 13 & 16 December 2010
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Eady :
- The First Claimant is Mr Michael Wilson, a successful businessman based in Aberdeen. He brings these proceedings both in his personal capacity and as a trustee of a company pension scheme known as "Donwin". The Second Claimant is the current corporate co-trustee of that fund. Several claims have been formulated against the Defendants, with whom the Claimants had entered into "execution only" accounts to enable Mr Wilson to trade directly in various investment products. Following this, he traded frequently and aggressively on behalf of himself and/or Donwin between July 2003 and March 2005 in contracts for difference (CFDs), futures and options and also by way of spread betting. Now, putting the matter briefly, it is sought to recover the Claimants' losses during that period, by one means or another, from the Defendants. A significant element in those losses is represented by large sums incurred through frequent trading in terms of commission and dealing charges.
- Much evidence has been introduced, both expert and factual, in order to explore the Claimants' extensive trading, albeit inevitably on the basis of sampling, but it soon emerged that ultimately the determination of these claims will turn largely upon the construction of contractual and statutory provisions.
- The Defendants are financial intermediaries, brokers and derivatives traders and are regulated by the Financial Services Authority ("FSA"). The claims against them are based on alleged breaches of duties said to be imposed by the Financial Services and Markets Act 2000 ("FSMA") and/or breaches of contractual terms (express or implied) and/or negligence at common law. It is necessary at the outset, therefore, to give detailed consideration to the statutory and contractual framework governing relations between the parties.
- At various times four accounts were opened with the Defendants:
i) a CFD account between Mr Wilson and the Second Defendant (CD3581);
ii) a CFD account between Donwin and the Second Defendant (CD3587), which was later novated with effect from 30 April 2004 to the First Defendant;
iii) a futures and options trading account between Mr Wilson and the First Defendant (T6214);
iv) a spread betting account between Mr Wilson and the First Defendant (S10105).
Detailed terms of business governed relations between the parties in respect of each of these accounts. A notable feature of this case is that Mr Wilson seems often not to have taken the trouble to read or fully understand the terms governing his relations with the Defendants.
- That is the background against which it is claimed in this litigation, on his behalf, that Mr Wilson did not understand the nature of the trading activities he undertook on his own account or on behalf of Donwin. Despite the "execution only" basis of his dealing through the Defendants, he now seeks to present himself as having sought and depended upon the Defendants' advice as to his general strategy and as to particular trading transactions.
- To this end, reliance was placed on transcripts of telephone conversations between himself and Mr Dean Gainsley, one of the relatively junior brokers employed by the Defendants over the relevant period. These transcripts, although running to two lever arch files, represent only a fraction of the communications that took place between them. Nevertheless, the court was invited on Mr Wilson's behalf (at least initially) to regard them as representative and as a typical cross-section of their frequent traffic. He now sees Mr Gainsley as a "blabbermouth" who was urging him to trade frequently in order, as I understand the case, to run up commissions and dealing charges. From the transcripts themselves, it appears that over many months they had built up an easy and friendly relationship in which information was exchanged and ideas bounced off each other. That seems to have been one of the principal purposes for which "execution only" clients were allocated a particular executive ("the account handler") with whom to make contact and keep in touch.
(ii) The regulatory framework
- It is common ground that the Defendants were bound by the rules set out in the regulatory provisions contained in the Conduct of Business Sourcebook (or "COB"). They contain rules designed to prevent any attempt to exclude or restrict liability: see COB 2.5.3R and 2.5.4R. There is a statutory cause of action available to Mr Wilson personally in respect of any losses he can demonstrate to have flowed from a breach of such rules: s.150 of the FSMA 2000 and Sched.5 of the COB. It was not, however, accepted that such a claim would be open to Donwin; in the sense that neither Mr Wilson qua trustee nor the Second Claimant, suing only in that capacity, would be able to seek a remedy for breach of statutory duty. That is because of the definition of "private person" contained in s.150(1) of the FSMA 2000 and in Regulation 3 of the FSMA 2000 (Rights of Action) Regulations 2001. Only a private person can sustain such a claim; that is to say
"(a) any individual, unless he suffers the loss in question in the course of carrying on:
(i) any regulated activity
(b) any person who is not an individual, unless he suffers the loss in question in the course of carrying on a business of any kind."
It is submitted by the Defendants that the original corporate trustee of Donwin (Prudential Pension Trustees Ltd) and its successor, the Second Claimant, cannot have sustained any loss as an individual. Moreover, they were carrying on the business of trusteeship and/or of seeking to make a profit for the pension scheme by trading in investments. As to Mr Wilson, in his capacity as a trustee, he cannot be described, either, as having suffered any such loss as an individual.
- These arguments seem to me to be clearly correct and, accordingly, if Donwin were to recover for any demonstrable loss, on the original pleading, it would have to be by some other route than the statutory cause of action.
- The claim in this respect was reformulated at the beginning of the trial and expressed, with my approval, in the form of a letter dated 6 December 2010. This contention was to the effect that Donwin could rely on ss.71(2) and 150(3) of the FSMA 2000 and Regulations 5(3) and 6(2) and (3)(c). These provide that in "prescribed cases" a contravention may be actionable by persons other than "private persons"; that is to say, in circumstances where such a person is acting in a fiduciary or representative capacity on behalf of a private person and (a) any remedy would be exclusively for the benefit of that private person and (b) such remedy could not be effected through an action brought otherwise than at the suit of the fiduciary or representative. By this means, it was sought to take advantage of a breach of the statutory duty notwithstanding any finding to the effect that the Second Claimant and Mr Wilson, qua trustee, should not be classified as "private persons". It was acknowledged on the Defendants' behalf that, on this formulation, Donwin would be able to recover in respect of any breaches that might be established of ss.71(2) and 150(3) of the Act.
- The FSMA 2000 is implemented by means of the FSA Rulebook or Handbook. This is divided into sections known as "sourcebooks". Prior to amendments made to the Claimants' case in June 2010, considerable emphasis was placed upon the sourcebook known as APER ("Approved Persons Principles and Code of Conduct"). It is necessary to see this in context. There are two primary tiers in the statutory and regulatory regime. First, there are "authorised persons", consisting of businesses given permission under Part IV of the FSMA 2000 to conduct "regulated activities". The Defendants are authorised persons who are permitted to make arrangements with a view to transactions in investments (that being a regulated activity). Some individual employees, however, are separately regulated by the FSA, in respect of certain specific functions, as "approved persons". That reflects the second tier of regulation as governed by APER.
- An authorised person may apply for FSA approval to enable employees to carry out certain "controlled functions". If granted, the approval is confined to one or more of those functions. Mr Gainsley, for example, was at the material times an approved person in respect of two controlled functions, namely CF22 (as a trainee investment adviser) and CF26 (the function of customer trading). The statutory cause of action under s.150 of the FSMA 2000, to which I have already referred, is limited to claims against authorised persons, who are governed by COB. There is no statutory cause of action against approved persons, regulated by APER.
- It follows that the only statutory cause of action available to the Claimants against the Defendants, as authorised persons, is in respect of any established breach of COB. Obviously a breach of COB can only be committed by an authorised person (albeit through individual employees). An approved person would be incapable of this and, therefore, no question arises of an authorised person being vicariously responsible for a breach of COB by an approved person.
(iii) The attempt to imply terms
- It seems, in the light of this distinction, that amendments were made in paragraph 36 of the re-amended particulars of claim to rely on the implication of certain contractual terms. One is inevitably wary, of course, of any attempt to introduce into "execution only" contracts terms which would have the effect of simply undermining and controverting that fundamental basis of doing business or of unbalancing the statutory regime put in place by the legislature.
- In particular, it was sought to introduce by amendment implied obligations on the Defendants' part to comply with COB and also with APER. There is, of course, no need to imply an obligation to comply with the former, since it is imposed by statute – and can be enforced by statutory remedies: see e.g. Redmayne Bentley Stockbrokers v Isaacs  EWHC 1504 (Comm) at . As to the latter, it makes no sense to imply in a contract with authorised persons an obligation to comply with statutory regulations governing approved persons. The Defendants are given by Parliament a set of obligations of their own (i.e. though COB).
- For good measure, as the Defendants point out, their terms of business (in each of the relevant contracts) point up the distinction between the regulatory and the contractual obligations: see Clause 5 of the Spread Betting Terms of Business, Clauses 2.3 and 3.1 of those governing CFDs and Clause 5.6 of those governing futures and options. It would thus simply be contradictory to drag in the statutory obligations and give them a contractual status by implication.
(iv) The allegation that Mr Gainsley exceeded his permitted functions
- In paragraphs 60 to 63 of the re-amended particulars of claim, the Claimants introduce a case against the Defendants based on the proposition that Mr Gainsley carried out a controlled function for which he was not approved. It is said that he acted as an investment adviser (the CF21 function) when he was only permitted to give investment advice as a trainee under supervision (i.e. CF22). The claim is made, therefore, that he was in breach of Principle 2 of APER and that the Defendants must be held vicariously liable for that and for any loss resulting from it.
- Parliament made no statutory provision for remedies for breaches of APER principles (by contrast with the position in relation to breaches of COB rules). There is no other juridical basis for making such a claim. This is a point which the Claimants' expert, Mr Jones, failed to appreciate. He was under the impression that the Defendants themselves were obliged to comply with APER: see e.g. paragraph 146 of his report dated 16 September 2010.
- In any event, it would be the Defendants' case that Mr Gainsley was doing no more than carrying out his approved CF22 function, as a trainee, and that he was at all material times under supervision. That was confirmed in evidence before me by Mr Nigel Avey (the director who signed the statement of truth on the amended defence). Although his evidence was disputed by Mr Jones, he is not in a position to gainsay him. He was first supervised by a Mr Avery-Wright and later, from late August 2003, by Mr Nicholas Sparkes (who gave evidence and confirmed that Mr Gainsley was supervised). Moreover, I need to bear in mind that Mr Gainsley was on the desk concerned with CFDs but not directly involved in either futures and options or spread betting.
- A variant on the theme is to be found in paragraph 6 of the re-amended particulars of claim, where it is alleged that the Defendants are liable for a breach of statutory duty for having failed to take reasonable care that Mr Gainsley did not carry out a controlled function for which he was not approved: ss.59(1) and 71(1) of the FSMA 2000. It is accepted that there is available a statutory remedy under these provisions if it can be demonstrated that Mr Gainsley stepped outside his approved functions and the Defendants had failed to take reasonable care to ensure that he did not do so. There is some confusion over the way this claim has been pleaded, however, since those provisions are not concerned either with a breach of COB or of APER. Be that as it may, what is clearly required is for the Claimants to prove on a balance of probabilities that, as a result of the Defendants' failure(s) to take reasonable care, Mr Gainsley did step beyond his approved function(s) and that, having done so, he did or failed to do something which caused loss. In other words, the causal link has to be established between the failure and the loss. Were the Claimants led to take some step, as a result of Mr Gainsley's exceeding his function, which resulted in a loss that would not otherwise have been caused?
- There seems to be a suggestion on the part of Mr Jones that in establishing a claim under s.71(1) the burden on a claimant is relatively light so far as causation is concerned. He suggests, at paragraph 108 of his report, that a claim will lie in respect of loss attributable to the mere fact of having "dealt with an unapproved individual". He added, "This does not require the private person to prove that the firm was negligent or even that [he] relied on the authorised firm". Whether that is so or not is clearly a matter of law for the court to determine rather than for expert evidence. In accordance with general principles, it seems to me that the Claimants would need to establish a causal chain whereby the supposed breach (failure to take care) led Mr Gainsley to do something, or to fail to do something, which led to a different and more adverse outcome than that which would otherwise have occurred.
(v) The Claimants' allegation that the Defendants failed to classify them correctly:
(a) Mr Wilson's CFD account
- As I indicated earlier, the central task of the court must now be to focus on the contractual obligations of the Defendants and the extent of their compliance with COB. In the forefront of the Claimants' case is that the Defendants failed to comply with their obligation to classify a client appropriately under COB 4.1.4R and 4.1.9R. (It is to be noted that any paragraph in COB to which a capital R is attached represents a rule, whereas a capital G is attached where guidance only is intended.)
- It is said that in relation to CFDs, and also futures and options, the Claimants were wrongly given the classification "intermediate customer" instead of "private customer". The significance of the distinction is that a lower level of regulatory protection is afforded to intermediate clients. The point does not arise in the context of spread betting, since all clients are classified by the Defendants as private customers for that purpose.
- The terms of the relevant provisions are as follows:
Requirement to classify
(1) Before conducting designated investment business with or for any client, a firm must take reasonable steps to establish whether that client is a private customer, intermediate customer or market counterparty.
(2) A firm which takes reasonable steps to classify its clients, as required by the rules in this section, and treats a client in accordance with the classification it has established for that purpose, does not breach any other rule in COB to the extent that the breach arises only from inappropriate classification of that client.
Expert private customer classified as an intermediate customer
(1) A firm may classify a client who would otherwise be a private customer as an intermediate customer if:
(a) the firm has taken reasonable care to determine that the client has sufficient experience and understanding to be classified as an intermediate customer and
(b) the firm:
(i) has given a written warning to the client of the protections under the regulatory system that he will lose;
(ii) has given the client sufficient time to consider the implications of being classified as an intermediate customer; and
(iii) has obtained the client's written consent, or is otherwise able to demonstrate that informed consent has been given.
(2) For the purposes of (1), a client's consent to being classified as an intermediate customer may be limited to one or more types of:
(a) designated investment; or
(b) designated investment business.
(1) To take reasonable care to determine that a client has sufficient experience and understanding to be classified as an intermediate customer for the purposes of COB 4.1.9R(1)(a), the firm should have regard to:
(a) the client's knowledge and understanding of the relevant designated investments and markets, and of the risks involved;
(b) the length of time the client has been active in these markets, the frequency of dealings and the extent to which he has relied on the advice on investments of the firm;
(c) the size and nature of transactions that have been undertaken for the client in these markets;
(d) the client's financial standing, which may include an assessment of his net worth or of the value of his portfolio.
(2) It is likely that a firm will need to have regard to more than one of these criteria, or to other criteria, before it can be satisfied that a client, who would otherwise be a private customer, is eligible to be classified as an intermediate customer."
- Where there is a challenge to the carrying out of the classification exercise under COB 4.1.9R, the court is not concerned to come to its own separate and objective assessment of the "correct" classification. The test is whether reasonable care has been taken to determine that the client had sufficient experience and understanding to be classified as an intermediate customer: COB 4.1.9R(1)(a). This approach accords with recent first instance authority in Spreadex Ltd v Sekhon  EWHC 1136 (Ch) at  and Maple Leaf Macro Volatility Master Fund v Rouvroy  EWHC 257 (Comm) at .
- In determining that question, it is clearly appropriate for the court to have regard to the criteria identified in the guidance contained in COB 4.1.10G. It is also necessary to take into account the extent to which there was compliance with the three procedural steps prescribed at COB 4.1.9R(1)(b).
- It is plainly right that these questions should be addressed separately in relation to each of the three relevant contracts (i.e. CD3581, CD3587 and T6214). (Moreover, I bear in mind that there is a requirement under COB 4.1.15R that there should be an annual review of a client's classification. This did not take place in the present case, but the length of the relationship was very short. It is not a factor that would have made any difference.)
- Apart from the contemporaneous documents, I heard evidence from two compliance specialists who worked for the Defendants at the time, Mr Nigel Avey and Mr Jeannot Huijnen.
- It seems clear from the evidence of both these witnesses that the standards of "reasonable care" in this context, at the material times, did not extend to setting the client, or prospective client, a test or examination to assess his level of knowledge or competence. Nor was there any general understanding that a client's statements of fact about himself or his expertise should be tested or doubted. I see no reason why such statements should not be taken at face value unless and until there is some reason to apply further scrutiny.
- Although it was not required under COB or any other regulatory provision, the Defendants in seeking to discharge their responsibilities as to classification of clients applied, at the time, a two stage procedure. The compliance department would arrive first at a preliminary classification and, in the light of that, tailor the documentation to be sent to the customer for the purpose of seeking further information. That required the client to set out his own account of his experience and understanding as to the relevant investment products. After that was reviewed, a final classification would be made. One of the reasons for adopting the two stages was that it might be confusing to customers to receive a whole lot of documents relating to other classifications and which were likely to have no relevance to their own particular circumstances.
- The Defendants' expert, Ms Robbins, has expressed the view that this procedure was consistent with standard industry practice. This was based on her own experience in particular organisations and not on any analysis of competitors' documentation, since such material would generally be regarded as confidential. Nonetheless, her evidence is credible and there is no other material to justify concluding that the procedure was unique to the Defendants.
- Against this background, the Claimants' suggestion that the Defendants' documentation was so flawed that it could never serve to achieve compliance with COB 4.1.9R seems far-fetched. Mr Jones' evidence comes close to claiming that all compliance officers in the industry have got it wrong. Yet it is a stance which the Claimants are driven to adopt with a view to showing that the Defendants would have been in breach even if Mr Wilson's answers had been complete and truthful.
- At the first stage, in May 2003, a Ms Vicky Fenn of the documentation department incorporated in an electronic CD/1 template the relatively limited information obtained up to that stage from Mr Wilson in the course of a telephone call. This conversation appears to have taken place between him and a Mr James Allan in the first few days of May. Mr Wilson described Mr Allan as a salesman who had made contact after he had attended a seminar in Edinburgh.
- I see no reason, however, to believe that the information thereafter recorded in her template by Ms Fenn was derived other than from Mr Wilson. There is no reason why Mr Allan or Ms Fenn should make it up.
- Several times in the course of his evidence Mr Wilson mentioned a tendency among some people, in his experience of the world of trading, to talk up their own expertise or success, seemingly as part of a macho culture. I gathered that he acknowledged an inclination on his own part to present his experience in the best light. On day 4, for example, he was seeking to explain in cross-examination some remarks he had made on the ADVFN website on 17 June 2002. One explanation was that "I am trying to add credibility to myself". I cannot come to a conclusion that this is why he supplied the Defendants with inaccurate information about himself, but whether that is the reason or not, the Defendants were entitled to take his factual statements at face value.
- Critically, for present purposes, there is the information contained in Ms Fenn's CD/1 form to the effect that Mr Wilson had been dealing on a daily basis in shares for some five years through TD Waterhouse. The approximate average worth of his individual transactions was estimated at £10,000. As to CFDs, the statement made was to the effect that he had been dealing daily for one year through the IG Group – again at the level of £10,000 per transaction. If those statements were true, they speak of a considerable level of experience and it could hardly be said that, having traded at those levels, he would still be unaware of the risks involved. It would be unrealistic to suppose that he would be unaware, either, of the incidence of commission and dealing charges (albeit obviously the levels would depend on a number of factors and upon the terms of particular contracts).
- Ms Fenn chose a preliminary classification of "experienced (non-private customer)". That would have been available to her to select from a drop-down menu and would equate to what is now generally referred to as an "intermediate customer". In the light of this, a draft covering letter would be prepared for the client together with other documents. More senior staff would then review the appropriateness of the documentation and the preliminary classification.
- As Mr Avey explained, a total of eight documents would have been sent to Mr Wilson dated 6 May 2003. They included a "signatures and information schedule" which was placed in evidence and contained Mr Wilson's assessment of a number of factors highly relevant to the final classification:
- more than two years experience of trading in "shares, bonds and funds": frequency of trading daily: average trade £20,000
- less than six months experience of trading in "financial futures and options"
- more than two years experience of trading in "commodity futures and options"
- as to trading in "CFDs or Financial/Spread Betting", between six months and two years experience: no information was given as to the frequency and size of trading
Mr Wilson's "investment horizon" was given as up to 12 months and it was said that he wished to accept "a calculable risk in order to achieve a profit".
- gross annual income in excess of £300,000: several properties owned: net assets in excess of £300,000: intending to allocate 1-10% of risk capital to the proposed trading.
In the CFD Facility Letter, Mr Wilson acknowledged that he accepted the Defendants' terms of business and that he was to be regarded as an intermediate customer. This was also clear from the terms of business. These included in Clause 4 also the clear statement that the account was to be opened on an "execution only" basis. There was additionally a letter specifically addressed to intermediate customers, which made clear that FSA rules required that he should give his consent to being so classified. That consent was given on 7 May 2003, expressly confirming that he had taken time to consider with care the implications of being an intermediate customer, and that he had read and understood the warning that, as such a customer, he would not enjoy certain specified protections afforded under the FSA rules for private customers.
In this respect, the relevant letter of 6 May 2003 was very specific and contained the following passages:
"As a consequence of this categorisation certain protections afforded to private customers under the rules of the FSA will not apply. In particular the following provisions of the Conduct of Business Sourcebook (the "COBS") will not apply to you:
- provisions which regulate the way in which firms can make 'direct offer' financial promotions, including the obligation to give a warning to obtain advice on suitability, to provide details of charges and to provide detailed information about investments etc.;
- provisions which regulate the way in which firms can communicate and/or approve financial promotions being made to you by overseas persons or unauthorised persons;
- provisions designed to ensure that private customers understand the nature of the risks inherent in certain transactions;
- provisions designed to ensure that private customers are made aware of the costs to them, directly or indirectly, of financial services provided by a firm;
- provisions to ensure that firms only lend money or grant credit to private customers in appropriate circumstances, and only if the customer has given prior consent in full knowledge of any resulting interest and fees;
- provisions to ensure firms manage private customers' exposure to contingent liabilities by diligently monitoring their relevant provision of credit; and
- provisions to ensure that a firm deals fairly with a private customer where the firm makes a market in any non-exchange-traded security purchased by the customer.
In addition, under the various provisions of the COBS your protection may be limited or modified in consequence of your classification as an intermediate customer as set out below:
(a) Financial promotion
In the course of any financial promotions we communicate to you, we will not be obliged to include a description of any further details or consequences of entry into any of the investments contained in such promotions. In addition, we will not be obliged to provide you with past performance details of investments offered by us. We are also not prevented from obtaining express requests from you for an unsolicited real-time financial promotion (e.g. face-to-face or by telephone) we may wish to make to you.
(b) Confirmation of transactions
In relation to confirmations posted by us on our website, we are not obliged to ensure you are viewing your confirmations or to bring them to your attention.
(c) Periodic statements
We do not need to provide periodic statements to intermediate customers.
In addition, the following provisions of the COBS are modified, as explained below:
(i) Best execution
Our terms of business state that we do not owe you a duty of best execution. This could mean, for example, that you do not get the best price theoretically obtainable in the market.
Where assets of yours are given to us for safekeeping, we will have more flexibility over who holds those assets, we are not obliged to explain the effects of pooling of assets to you, we will have more flexibility in the manner in which statements are provided to you, and if your assets are used for stock-lending, we will have more flexibility in relation to provision of collateral and monitoring of exposure.
You will also have no right of access to the Financial Ombudsman Scheme.
Furthermore, we may have regard to your expertise when complying with requirements under the regulatory system that communications must be clear, fair and not misleading."
Once this documentation had been received, a Ms Flatman of the compliance department reviewed all the information and assessed the preliminary classification in the light of that. From the CD/1 form, it appears that the process was completed by 30 May 2003 and that the intermediate classification was confirmed. Trading on Wilson's CFD account eventually began on 11 July 2003.
The first question to determine against that background is whether the Claimants have demonstrated on a balance of probabilities that the Defendants failed to comply, in reaching the classification, with COB 4.1.9R. If so, Mr Wilson seeks to recover the losses he claims to have suffered following from the fact that he was not classified as a private customer and thus deprived of the protections to which he would otherwise have been entitled.
The Defendants contend that they were entitled to reach the conclusion that Mr Wilson had an appropriate level of knowledge and understanding as to CFDs and the attendant risks. They claim that they fulfilled the requirements of COB 4.1.9R(1)(b). Moreover, from the information I have already identified, it is apparent that they had material relevant to each of the criteria set out in COB 4.1.10G, although the experts differed on the fundamental question as to whether reasonable care had been taken to determine whether Mr Wilson had sufficient experience and understanding.
As I have pointed out, Mr Wilson failed to supply the information requested in the "signatures and information schedule" as to the frequency and scale of his trading in relation to CFDs, futures and options or spread betting. The Defendants had therefore less information in these significant areas than they would have liked. It was thus possible to make only a correspondingly less informed judgment about such matters. They had asked Mr Wilson and he had declined to answer. They could hardly go to TD Waterhouse or the IG Group for the information, as it would almost certainly be regarded as confidential. At least, however, so far as CFDs were concerned, they did have the information on the CD/1 form to the effect that he had traded daily for a year at an approximate average level of £10,000.
Ms Robbins was of the view that it is legitimate, and indeed standard practice, to make a decision about a client's experience and understanding by way of inference from such factors as the length of time for which he has been trading, as well as from the frequency and scale of transactions. Short of setting an examination, it is difficult to see how else to come to a conclusion. As to shares and CFDs, it would be reasonable to draw an inference from the scale and frequency of dealing. He would, on any practical assessment, have acquired a good deal of experience and understanding as to the way the markets worked, as to the incidence of commissions and dealing charges, and as to the risks attaching to such trading. Furthermore, in relation to commodity futures and options, if he had been trading for more than two years he could hardly fail to be aware of the risks. Plainly, there would be less experience, and probably less understanding also, in relation to financial futures and options. Mr Jones understandably observed that "less than six months" would be consistent with one trade having taken place on one day. Also, more generally, in so far as no information has been provided about frequency and scale of trading, the data would be consistent with very limited experience and understanding of those products. On spread betting, it would be virtually impossible to make any assessment at all.
It is necessary to keep in mind, as I have said, that the test to be applied is not whether the Defendants had acquired any particular degree of knowledge about the customer's experience and understanding, in any given field of activity, but rather whether they have taken reasonable care in the circumstances.
The guidance contained in COB 4.1.10G did not require the Defendants to have regard to all of the four factors identified, but it indicates merely that it is likely that a firm will need to have regard to more than one of them, or to other criteria, before being satisfied as to the appropriate classification. Even this has the status of guidance only ("G"). It is of some interest, however, that the Defendants' own manual at the time appears to have set a higher standard, consistently with their desire to achieve best practice. This made it clear that the Defendants would aspire to have regard to all four of the guidance criteria. The Claimants have prayed this in aid. Yet Mr Smith argued that internal compliance manuals are irrelevant to the present task, since the court is concerned with requirements of law. There is no legal obligation to "score" on all four criteria. That would appear to be correct.
It is nonetheless right to summarise the Defendants' state of knowledge having regard to each of the four specified criteria:
i) They only had what is contained on the CD/1 form and the "signatures and information" document from which to infer Mr Wilson's (and through him Donwin's) experience and understanding of the designated investments and markets and of the risks involved. This was not very much and as to spread betting was virtually nil. One of the problems about the standard form is that different investments are jumbled together (most notably in "CFDs or Financial/Spread Betting").
ii) Likewise, as to frequency and length of dealings, the information was very limited.
iii) The size and nature of transactions was not readily apparent in relation to futures and options or spread betting. The CD/1 form did indicate daily frequency for CFDs with an average size of £10,000.
iv) There was general information about his financial standing, which would only give an assessment of his ability to meet debts and/or take losses. In itself, it would shed very little light on Mr Wilson's suitability to be an intermediate customer.
In cross-examination, Mr Jones appeared to agree that the Defendants were, in the light of the information they had, in a position to satisfy three of these four criteria. The only one in respect of which he disputed this was the first (i.e. "knowledge and understanding"). He confirmed that this was his view in relation to both the CFD and futures and options accounts (although still contending that the Defendants' standard form for futures and options was "wholly deficient" for classification purposes).
One criticism made of the Defendants' procedures is that the three steps required in COB 4.1.9R(1)(b) should have been taken prior to the preliminary classification reached by 6 May 2003. It would not, say the Claimants, be sufficient to complete them prior to the commencement of trading on 11 July. I would reject that point, as the timescale is clear from COB in that classification must take place before the "designated investment business" is conducted. No other limitations are imposed: see especially COB 4.1.4R. It is thus within the Defendants' discretion (as with other "firms") to organise the format and sequence of their communications with the customer, including the adoption of a two stage process.
I would not accept the Claimants' submission that they occupied a "default position" as private customers until "opted up to intermediate customer status". The Defendants were entitled, indeed bound, to go through a classification process and, until that was complete, the Claimants would meanwhile not have any classified status.
It is not an attractive stance for Mr Wilson now to contend that the Defendants had insufficient information for the classification process in circumstances where the gaps in their knowledge are attributable to his failure to supply the information sought. It is also unattractive for him to place reliance on the fact that he supplied the Defendants with information that was inaccurate. For example, he stated that it was incorrect to claim that he had more than two years experience of trading commodity futures and options. He added, "I am unclear now as to why this box was ticked". He referred also to the answer on the form to the effect that he had between six months and two years experience of "CFDs or financial/spread betting". He explained that: "This was not quite right – while I had opened my IG Markets account over six months previously I had only been trading for a few months".
His explanation for these inaccuracies was as follows:
"I cannot recall why certain of the answers on the form were given. I think this was partly because I did not properly understand the nature of the products referred to in the form and partly due to errors deriving from the lack of importance I attached to the form … ."
Mr Wilson also complains that he was not given sufficient time to consider the implications of being classified as an intermediate customer. He returned the forms signed, of his own volition, on 7 May 2003. If he required more time, he could have taken it. Nevertheless, it is quite clear that he acknowledged in the signed declaration that he had taken such time as was necessary carefully to consider the implications of being so classified. The Defendants were entitled to rely upon that.
So too, as I have already indicated, the Defendants were entitled to take any claims Mr Wilson made as to his past trading or dealing experience at face value.
(b) Donwin's CFD account
Thus far, I have been considering the position in relation to Mr Wilson's own CFD account. I should now turn to consider the circumstances in which the account was opened in Donwin's name (CD3587).
It was accepted in evidence by Mr Jones that it would be reasonable for the Defendants to make an assessment of Donwin by reference to the background of Mr Wilson and, in particular, his experience and understanding of the designated investments and markets. He agreed that "the two stand or fall together" in this respect. That is how the preliminary classification was arrived at by Ms Fenn and that is the basis upon which it was reviewed by more senior members of staff and, ultimately, how the final classification was arrived at.
The documentation, dated 12 May 2003, was sent to Donwin a little later than that sent to Mr Wilson. The acknowledgment that Donwin had taken time to consider and understand the implications of the preliminary classification of "intermediate customer" was signed not only by Mr Wilson but also on behalf of the Second Claimant's predecessor as corporate trustee. This took place on 20 May 2003.
Thereafter, steps were taken formally to distance Prudential Pension Trustees Ltd from Donwin's investment activities, and my attention was drawn to a letter from a Ms Abbott, written on behalf of Prudential on 2 June 2003, which contained the following disclaimer:
"I note that the scheme is being regarded as an Intermediate Customer based on Mr Wilson's experience and understanding of the investment. Please note that PPTL will not be making any investment decisions concerning the account and therefore will not be liable for any investments made."
It thus appears that the Defendants were treating Donwin, from the outset, as effectively an alter ago of Mr Wilson. It was finally classified as an intermediate customer a few days after Mr Wilson (on 3 June 2003) and trading began on its behalf on 14 July of that year.
Prior to her letter of 2 June 2003, Ms Abbott had signed the "signatures and information schedule" in respect of Donwin and at no stage raised any query as to the appropriateness of the classification of Donwin as an "intermediate customer". There is no reason to suppose that Ms Abbott, or her fellow signatory on behalf of PPTL, one CM Terrey, failed to understand the significance of the contractual documents generally or of the customer classification in particular. They would have come to an independent conclusion on these matters – however superficially Mr Wilson entered into his own contractual obligations.
(vi) My conclusions on the classification issue: CFDs
I have come to the conclusion that the Defendants complied with the requirements of COB 4.1.9R and took reasonable care to determine that the Claimants had sufficient experience and understanding of CFDs. Their determination was based on a system carefully designed to convey warnings and elicit information from the potential customer such as would enable them to achieve compliance. It provides a framework for ensuring that reasonable care is taken and for recording the outcome. I was invited, if necessary, to waive any procedural irregularity by reference to COB 4.1.4R(2), set out above. In the event, I see no reason to do so.
(vii) Classification in the context of futures and options
I must next consider Mr Wilson's futures and options trading account (T6214). It was on 25 June 2003 (i.e. prior to the commencement of trading on either of the CFD accounts) that Mr Wilson made an approach to Mr Ben Probert, who was a member of the sales team on the futures and options desk, with a view to opening the account. Mr Probert gave evidence in the course of the trial. He explained that it would probably have been Mr Gainsley who pointed Mr Wilson in his direction.
There was a similar classification process carried out in relation to this account as for the CFD accounts. In the light of the fact that Mr Wilson had already been classified as "intermediate" for that purpose, he was given a similar classification in relation to futures and options. The account opening form contained a declaration, signed by Mr Wilson, to the effect that the information he had given was "true and complete". Also, he acknowledged that the Defendants were entitled to place reliance on the information provided for the purpose of classifying him as an intermediate customer.
The form also contained Mr Wilson's request for an "execution only" service so as to enable him to trade in on-exchange Futures and Options (both in relation to "financials" and "commodities"). In this instance, he gave his primary investment objective as "hedging" rather than "speculation", but the significance (or otherwise) of this has to be assessed in the light of the fact that he was seeking an "execution only" service (not "advisory service") and would, accordingly, be making his own decisions both as to strategy and individual trades. Again, information was supplied as to Mr Wilson's wealth. In this instance, his net worth was put at £4.75m and the amount of risk capital at £0.5m.
In relation to futures and options, the final classification took place on 15 August 2003. Trading began on 22 January 2004.
Once again, Mr Wilson places reliance on the contention that some of the answers he gave in the account opening form were inaccurate. In particular, he now says that it was an error to include within the form the statement that he had traded single stock on-exchange futures for over a year, on a daily basis, the average size of the trades being £50,000. The form also referred to there having been over 100 trades through TD Waterhouse. He says that in fact he did not trade in futures with TD Waterhouse but only in shares.
It was also stated on the form that Mr Wilson had traded single stock on-exchange options for "over 1 year", on a "daily" basis, the average size being £30,000. Again, it was said that he had carried out more than 100 trades of that nature ("+ 100") through TD Waterhouse. He says now that he did not do so.
Mr Wilson puts these serious "errors" down to mistakes made by his then secretary, but the fact remains that the Defendants were entitled to place reliance upon them for the purpose of their proposed contractual relationship and, in particular, for the purpose of customer classification.
Moreover, Mr Wilson provided his written consent to that classification. He signed the documentation on 2 July 2003. Again, the Defendants contend that they fully complied with the requirements of COB 4.1.9R(1).
With reference to futures and options, Mr Smith summarised the Defendants' state of knowledge about Mr Wilson at that stage. He was a 38 year old managing director of substantial wealth who wished to open an "execution only" account to trade on-exchange financial and commodity futures and options and he apparently had:
- over one year's experience trading single stock futures on a daily basis through TD Waterhouse (the average size of trade being £50,000 and there had been more than 100 trades in the previous 12 month period);
- similar experience trading single stock options (the average size of trade being £30,000);
- started daily trading in spread betting products via IG Markets (the average size being £20,000);
- declared that he had read the risk warnings.
I am satisfied that the Claimants have not established any breach in this respect.
(viii) The significance of Mr Wilson's inaccurate representations
I pause at this point to comment that the scale and importance of the "errors" in the documentation have a wider significance. They demonstrate a casual attitude to telling the truth. Thus, it goes without saying, great caution has to be exercised before accepting any statement from Mr Wilson without corroboration. They do not, however, stand alone. I take one further example. In Donwin's report and financial statements for the year ended 31 August 2003, TD Waterhouse and "GNI Touch" (presumably the Defendants) were described, quite falsely, as investment managers to whom day-to-day investment decisions had been delegated. Not surprisingly, when taxed with this in the witness box, he was unable to offer any innocent explanation. He merely said that, for him, "the important part of the statement are the figures".
(ix) Spread betting
I turn to Mr Wilson's spread betting account (S10105). As I have made clear already, the classification issue does not arise in this context because Mr Wilson had "private customer" status. The subject of spread betting was discussed at a meeting on 21 August 2004 (i.e. more than a year after Mr Wilson and Donwin had been trading on the CFD accounts and about six months after Mr Wilson began trading in futures and options). Evidence was given at trial on this subject by Mr Daniel Beckerleg which was uncontroversial.
In the background, it seems that a friend of Mr Wilson's called Roy Forster was involved in the proposal to open a spread betting account. Negotiations took place over the level of charges that would be made by the Defendants in respect of this and a fairly hard bargain seems to have been driven. For example, Mr Stuart Lane (of the Defendants' spread trading department) stated on 22 September 2004:
"I am sorry that I am unable to improve on the spread you are already receiving but the s & p market already has a 0.25 point spread and if I go any lower it will all get a bit tight.
I hope that we can still provide a service to you and Roy for this business and I look forward to speaking to you soon."
This was in response to an email sent by Mr Wilson on 21 September 2004:
"Roy has highlighted to me how we have not got a detailed deal on our day trading/non[e] guaranteed stock positions on the s & p. I recollect advising you that we were currently on .05 and you were looking into what you could do for us if anything."
This appears to indicate an intention on Mr Wilson's part to carry on frequent and short-term trading on the spread betting account, either with or under the guidance of Mr Roy Forster.
Although they later fell out, it seems that Mr Forster was trusted by Mr Wilson to give him advice in these matters at that time. Indeed, he had entrusted to him no less than £200,000 for the purpose of carrying out spread betting trades on a discretionary basis.
Again, it is important to focus on the documentation sent to Mr Wilson in connection with the opening of a spread betting account. On 14 September 2004, Mr Lane sent him a copy of the spread trading brochure and made the following points in the covering letter:
"The application form can be found on page 22. Once completed, please return the form, along with the required supporting documents, using the pre-paid envelope provided. Please ensure that you have read and understood the enclosed Customer Agreement and Risk Warning Notice as these cover your dealings with us."
He was again reminded that the Defendants were governed by the FSA and invited to telephone them on a particular number if he had any queries regarding the brochure, the application procedure or spread betting in general.
In the FSA Risk Warning Notice, the following passage occurred in the introduction:
"This notice cannot and does not disclose or explain all of the risks and other significant aspects involved in dealing in contracts for differences in the form of Bets. Engaging in this type of transaction can carry a high risk. As these transactions differ markedly from normal Bets, you should not engage in this form of betting unless you understand the nature of the transaction you are entering into and the true extent of your exposure to the risk of loss. The amount that you may win or lose will vary according to the extent of the fluctuations in the price of the index ('the underlying markets') on which the Bet is based instead of a sum pre-determinable when a normal Bet is placed.
For many members of the public, these transactions are not suitable; you should, therefore, consider carefully whether they are suitable for you in the light of your circumstances and financial resources."
There were then set out eleven sub-paragraphs giving detailed warnings as to particular aspects of this form of trading.
Mr Wilson signed and dated the account application form on 21 September 2004. This contained a declaration by him that he had experience of financial spread betting through Cantor Index and IG Markets. He confirmed also that he had read, understood and agreed to the spread betting terms of business and the FSA Warning Notice. The first spread bet was placed by Mr Wilson on 6 January 2005.
(x) The significance of an "execution only" contract
It is fundamentally important in relation to all of these accounts to have in mind those clauses which made clear, in each case, that the parties had entered into an "execution only" arrangement and that the Defendants were under no duty to give advice to Mr Wilson or Donwin. Because, however, there would inevitably be communications between a client and one or more members of the Defendants' staff, it was important to make clear the basis upon which such communications would take place.
As I have already recorded, there were hundreds of telephone conversations between Mr Wilson and Mr Gainsley during the relevant period in which views were exchanged. The terms of business emphasised, therefore, that the Defendants were fully entitled to provide market information, advice and recommendations, but they were not deemed to give advice on the merits of particular transactions. Any such advice was to be regarded as "incidental" to the dealing relationship. No such communications would in any way undermine the basic nature of the relationship, which was "execution only" and non-advisory. These provisions are to be found in Clause 4 of the CFD terms of business, Clauses 11 and 13 of the Intermediate Customer Terms of Business and Clauses 9.2 and 9.3 of the Spread Betting Terms of Business.
(xi) The nature of the claims based on "incorrect" classification
The Claimants' argument was that Mr Wilson and Donwin should have been classified as "private customers" instead of "intermediate customers". Furthermore, it was originally said, as private customers they would not have been permitted by the Defendants to open the CFD or futures and options accounts. On that hypothesis, it was relatively straightforward to conclude that all losses were attributable to the breaches relied upon.
The fundamental assumption on which this causation argument was based, however, was flawed. As Mr Avey explained, the Defendants did permit private customers to open futures and options trading accounts which were regarded as "reasonably vanilla products". Moreover, although there had been a time when they did not accept private customers to trade on equity CFD accounts, the position had changed by the material dates. With effect from 22 February 2000, the Second Defendant was granted approval by the FSA to extend its equity CFD trading facility to private customers.
Mr Avey expressly confirmed, in the light of this background, that the Defendants would have permitted Mr Wilson to open a futures and options trading account and a CFD account even if classified as a private customer. The same policy would have applied to Donwin. I see no reason to reject his evidence. A new compliance manual came into effect in November 2003. By that time, of course, the Claimants had already been classified. I understand from Mr Avey's evidence that, for such a client, the Defendants' policy would have remained in effect following the novation of the CFD accounts after changes to the corporate structure. Thus, even if they had been classified as "private customers", they would still have been eligible.
I must turn, therefore, to address the way in which the Claimants now put the case on causation. This is derived from paragraphs 50 to 56 of the re-amended particulars of claim. I believe that the following extracts should make the nature of the case reasonably clear:
"52. Pursuant to COB 2.1.3R the First and/or Second Defendant would have been obliged to take reasonable steps to communicate with the First Claimant and Donwin in a way which was clear, fair and not misleading.
53. Pursuant to COB 5.3.5R(1)(a) the First and/or Second Defendant would have been obliged to ensure that any recommendation to buy or sell a designated investment which it made to the First Claimant or Donwin was suitable having regard to the facts about the First Claimant or Donwin which the First and/or Second Defendant knew or ought reasonably to have known.
54. Further, pursuant to COB 5.4.3R before making a personal recommendation of a transaction to, or executing a deal in a warrant or derivative on behalf of, the First Claimant or Donwin, the First and/or Second Defendant would have been obliged to take reasonable steps to ensure that the First Claimant or Donwin, as appropriate, understood the nature of the risks involved including, but not limited to, ensuring that the First and/or Second Defendant complied with COB 5.4.6E (1) and (3) respectively.
55. It is to be presumed that the First and/or Second Defendant would properly have complied with their obligations pursuant to COB 2.1.3R, COB 5.3.5R and/or 5.4.3 at all times during their dealings with the First Claimant, and in the premises:
55.1 they should have had regard at all times to the First Claimant's and Donwin's stated investment objectives, as recorded in the account opening forms and pleaded in paragraphs 23.8, 23.9, 26.10, 30.9 and 30.10 above, and which had not been varied in writing as required by the First and/or Second Defendants;
55.2 as stated in answer 7 to the Claimant's Further Information dated 23rd November 2009, the Defendants should have explained to the First Claimant at the commencement of the active trading relationship and periodically thereafter as required in the particular circumstances, that engaging in short-term trading involving frequent buying and selling was highly risky because the Claimants were effectively tossing a coin as to which way the market would go, and was likely to lead to loss because of the effect of the spread and the commission and financing charges payable on each transaction, and the more frequent the trading, the greater the likelihood of incurring an overall loss;
55.3 they should have advised and/or warned the First and/or Second Claimant at the commencement of the active trading relationship and periodically thereafter as required in the particular circumstances, that engaging in short-term trading involving frequent buying and selling was inappropriate for the First Claimant and Donwin having regard to their stated investment objectives."
Since the argument depends upon certain provisions of COB being triggered, it is convenient to set those out also:
"Requirement for suitability generally
(1) A firm must take reasonable steps to ensure that it does not in the course of designated investment business:
(a) make any personal recommendation to a private customer to buy or sell a designated investment; or
(b) effect a discretionary transaction for a private customer (except as in (3));
unless the recommendation or transaction is suitable for the private customer having regard to the facts disclosed and other relevant facts about the private customer of which the firm is, or reasonably should be,aware.
(2) A firm which acts as an investment manager for a private customer must take reasonable steps to ensure that the private customer's portfolio or account remains suitable, having regard to the facts disclosed by the private customer and other relevant facts about the private customer of which the firm is, or reasonably should be, aware.
(3) Where, with the agreement of the private customer, a firm has pooled his funds with those of others with a view to taking common discretionary management decisions, the firm must take reasonable steps to ensure that a discretionary transaction is suitable for the fund, having regard to the stated investment objectives of the fund.
Requirement for risk warnings
A firm must not:
(1) make a personal recommendation of a transaction; or
(2) act as a discretionary investment manager; or
(3) arrange (bring about) or execute a deal in a warrant or derivative; or
(4) engage in stock lending activity;
with, to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved."
It is clear that these provisions apply only to private customers. I have already ruled that the Defendants were entitled to classify the Claimants as "intermediate customers" in relation to the relevant contracts.
Mr Wilson has summarised his case as follows (in his second witness statement dated 30 September 2010, i.e. two weeks after Mr Jones' report):
"5. … I have been asked to consider how I would have traded if I had been classified as a private customer. I believe I would have still traded with the Defendants as a private customer. I believe this is what should have happened.
6. The trading strategy followed by me in the operation of my accounts with the Defendants resulted from the advice received from Mr Gainsley of the Defendants. I now understand that the trading pattern that Donwin and I followed in trading with the Defendants, namely short term trading (with trades often being closed intra-day and rarely being held more than 1-2 days) was highly risky and that a more long term trading strategy would have significantly increased my prospects of making a profit. I also now understand that this is in large part due to the effect of the high levels of commissions, spreads and charges from the Defendants on the higher volume of trading that resulted from this short term, high turnover trading strategy (whereas a longer term strategy with many fewer trades would have resulted in much lower levels of commissions, spreads and other charges). … I have no doubt that had I been advised to adopt a more long term strategy or fully appreciated the effect of the commissions, spreads and charges, I would have done so."
Since I have held in relation to contracts CD3581, CD3587 and T6214 that there is no legitimate complaint about the classification process, it would follow that those provisions as to "suitability" and "risk" could not have been triggered in any event.
(xii) The Claimants' "advisory" claim
The underlying assumption of this case is that the CFD accounts and the futures and options accounts were in fact conducted on an advisory basis (whatever the contracts provided) so as to give rise to the obligations to advise on "suitability" and "risk". The suggestion is that the Defendants should have advised Mr Wilson that a short term trading strategy was likely to lead to loss because of the effect of the spread and the commission and financing charges, and that more frequent trading would increase the likelihood of loss and, secondly, that it was inappropriate for him and Donwin to adopt such strategy having regard to their stated investment objectives. This has an air of unreality about it, given the way Mr Wilson in fact conducted his trading activities over the relevant period and the contractual framework set up between the parties at the outset.
It is no part of the case advanced at trial that the Claimants would not or should not have undertaken trading in the products they in fact chose. The way the case is put is that advice should have been given, generally, only to enter into CFD or futures and options transactions if there was an intention to hold them for 60 days or longer. According to the evidence of Mr Avey, which again I see no reason to reject, that would be a most unusual strategy for such products.
A significant obstacle in the Claimants' path, when advancing these arguments, is that the three "intermediate customer" accounts were all opened on the "execution only" basis. That is what Mr Wilson wanted. What he required, and what he regularly used for CFDs, was the "GNI Touch" online trading platform, which enabled him from his own computer to have direct access to the markets and afforded him real time information about his trading positions. He could trade himself without any reference to Mr Gainsley or anyone else if he so wished. He had an electronic, online and "execution only" facility also in relation to futures and options.
It is instructive, for the purposes of making a realistic assessment of the parties' relationship, to have in mind the negotiations as to the commission arrangements between them which took place prior to the commencement of futures trading. It reveals a good deal about Mr Wilson's intentions and strategy and also as to his background knowledge of the costs he was likely to incur. He was allocated a very competitive commission scale as, in effect, a professional trader. This emerges from a series of emails between Mr Wilson and Mr Probert between 14 January and 11 February 2004.
The fundamental point is that the parties were not in an advisory relationship at all. Accordingly, the COB rules set out above, imposing the obligations relied upon, had no application. The Claimants' case appears to be that in practice, and whatever the contractual documents actually said, the Defendants in fact took on an advisory role.
(xiii) The allegations made about the role of Mr Gainsley
It is thus important to have regard to the role of an account handler, such as Mr Gainsley, given the "execution only" contractual framework and the status of Mr Wilson and Donwin as "intermediate customers". This is made entirely clear in the express provisions of the terms of business for each of the relevant accounts. There was no duty on the part of the Defendants to advise, although they were entitled in their discretion to give clients market information, advice and/or recommendations. It would be clearly understood by any reasonable client in Mr Wilson's position, and especially if he had read the contracts concerned, that he was not being given advice on the merits of particular transactions and that any information or opinions offered were to be regarded as purely "incidental" to the dealing relationship.
Against this background, it is inappropriate to go through the hundreds of conversations that took place between Mr Wilson and Mr Gainsley, or even the relatively few that are available, with a view to classifying everything that fell from Mr Gainsley's lips according to a rigorous analysis into separate categories of "information", "opinion", "advice" and "recommendations". That is simply not the way the conversations were conducted. Obligations of that sort could not be imported without express written amendment to the terms of business governing relations between the parties.
It is difficult to understand the basis upon which the Claimants' expert, Mr Jones, felt able in the joint statement to come to the conclusion that Mr Wilson had been advised by Mr Gainsley to pursue a "risky short term trading strategy". That is a factual assertion outside the scope of an expert. There is simply no evidence that Mr Gainsley was ever asked for advice on Mr Wilson's trading strategy or that he ever volunteered it. The comment thus began to ring warning bells as to Mr Jones' objectivity. More startlingly, Mr Jones appeared quite casually to launch an attack on Mr Gainsley's integrity from the witness box – without any warning to that effect in his report and with no opportunity having been given to Mr Gainsley to address this serious charge during cross-examination. What he was, in effect, asserting was that Mr Gainsley had knowingly given inappropriate advice.
It is clear from the conversations that there was a good deal of banter and light-hearted badinage and, from having seen the transcripts and listened to a few samples from the audio tapes, it is clear to me that what was happening can best be characterised as exchanging information and "bouncing ideas" off each other or swapping hunches about the market. Much of it was spontaneous and off the cuff. It would be unfair and unrealistic to pick upon certain passages in Mr Gainsley's observations, with six or seven years of hindsight, and to conclude that he had suddenly changed into "advice mode" and was undertaking an obligation, on his own initiative, to give advice on behalf of his employers to an "intermediate customer". If such conversations were to be subjected regularly to analysis of that kind with a view to changing the express terms of the parties' relationship, brokers would not be able to operate and communications would soon be drastically curtailed.
It is important also to have regard to the notion of "personal recommendation" and the definition given to it at various stages by the FSA Handbook. At the times with which I am concerned in this litigation, and until 1 June 2005, the definition was somewhat skeletal: "a recommendation given to a specific person". Then it was rendered a little more specific: "a recommendation which is advice on investments given to a specific person". This clearly reflects the fact that "advising on investments" is a regulated activity within Article 53 of the FSMA 2000 (Regulated Activities) Order 2001.
The definition was then fleshed out further with effect from 1 November 2007:
"A recommendation that is advice on investments and is presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person."
I would regard the extended definitions applied subsequently as merely intended to clarify the concept, rather than narrowing it. The Claimants are suggesting that some of what Mr Gainsley said to Mr Wilson, from time to time, constituted personal recommendations. Accordingly, I take the Claimants' case to be that Mr Gainsley gave Mr Wilson (and Donwin) advice specific to him that was purporting to be based on a careful consideration of his (and Donwin's) circumstances; moreover, that he was giving such advice, not generally about the market or certain categories of investment, but by making a recommendation of a specific investment. Implied in any such recommendation is that the adviser has made it in preference to alternative investment possibilities which had been considered and compared.
Ms Robbins made the following points which seem, with respect, entirely valid:
"Under FSA COB Rule 5.3 Suitability, the Defendants would have owed a duty of suitability to the First Claimant or Donwin, had they been classified as Private Customers, when making a personal recommendation concerning a designated investment or acting as an investment manager. However, … a duty of suitability was not owed as the First Claimant and Donwin were correctly classified as Intermediate Customers. Furthermore, there was no contract to provide personal recommendations or to act as an investment manager for the First Claimant and Donwin, as the First Claimant and Donwin elected for execution-only accounts on their Account Opening Documentation."
It is accepted on behalf of the Defendants that, if I were to hold that Mr Gainsley in fact made one or more "personal recommendations" (within the meaning considered above), the Claimants would have corresponding rights by virtue of COB 5.3.5R – irrespective of how the relationship was described or defined in the Defendants' documentation. Whether he did so would be a question of mixed fact and law. Nonetheless, Mr Smith argues that it is impossible to ignore the contractual relationship in this context altogether. It is relevant as part of the background and of the history of the parties' relationship.
How would a reasonable person in either of the parties' shoes interpret Mr Gainsley's observations? It is not simply a question of taking passages from the transcripts in isolation, regardless of those individuals' past relationship, and asking whether it should be construed to contain a personal recommendation. Their communications took place against a particular factual background. This included an "execution only" account, specifically designed to enable Mr Wilson to implement his own strategy and personal day-to-day judgments about the market and the opportunities it presented. That strategy was always the backdrop against which their discussions took place. It was not something on which Mr Gainsley was called upon to advise or on which he ever did so. That would be contrary to their established modus operandi (reflecting, of course, what was set out in the contracts).
One can see, regularly in the course of their recorded telephone conversations, a situation in which Mr Wilson shares his thoughts with Mr Gainsley on how, in the immediate future, he was contemplating particular steps by way of forwarding his strategy. Mr Gainsley may react and make suggestions, but they could not be construed as "personal recommendations" because of that very context.
A significant part of the strategy Mr Wilson had selected for himself (and for Donwin) involved frequent day-trading in a very active and aggressive way. As it was summarised on day 9 by Ms Robbins: "It is very clear that they were seeking to make money by trading or putting on short-term trades and taking advantage of market changes and price changes". This strategy can be seen reflected in his modus operandi before coming into contact with Mr Gainsley and may be a factor of Mr Wilson's character and personality. One can see it also in his communications with other traders whom he either knew personally or communicated with by means of various websites (such as ADVFN or MoneyAM, which were explored in cross-examination). At all events, it was certainly not a modus operandi adopted on the advice of the Defendants. He also had particular stocks in which he was interested (such as, for example, Royal Bank of Scotland). While he might make off the cuff comments to Mr Gainsley about whether he should take long or short positions, in the light of possible movements in the market, it would be quite unrealistic to suppose that Mr Gainsley was, on any given occasion, making a "personal recommendation" one way or the other.
Mr Asif QC has argued that, in appropriate cases, the court should have regard to the reality of a particular trading relationship rather than focussing solely on the formal position expressed in a contract: see e.g. Geniki Investments International v Ellis Stockbrokers  EWHC 549 (QB),  1 BCLC 662, at -. Yet nothing I have seen on the transcripts, or heard on the sample tapes, would justify the conclusion that Mr Gainsley decided, off his own bat, to change the basis of his relationship with Mr Wilson and to make "personal recommendations".
In this context, it is worth having regard to the observations of Ms Robbins, which again seem to me to be apposite:
"156. … I have … considered whether the trading advice given by Mr Gainsley may be characterised as a 'personal recommendation' that Mr Wilson could rely upon. In order for this to be the case I consider that several factors would need to be present to conclude that the trading advice represented a personal recommendation, including:
(a) Whether the market commentary and trading advice amounts to a 'personal recommendation' to a Private Customer that is specific and presented as suitable for that person in the light of their personal and financial circumstances and investment objectives. In my view this is not the case in respect of the telephone conversation transcripts and tapes between the First Claimant and Mr Gainsley that I have reviewed.
(b)The obligations of the authorised and regulated firm under FSA Rules. As set out in this Report I am of the opinion that the Defendants did not owe the First Claimant and Donwin a duty of suitability in light of the execution-only relationship for all Relevant Accounts and in the light of the acceptance by the First Claimant and Donwin of the Intermediate Customer classification in respect of the CFD Accounts and the Futures and Options Account.
(c) Content. An example of market commentary and trading advice without making a personal recommendation would, in my opinion, be a broad statement such as (to use a hypothetical example) 'the market is selling the FTSE but I would hang in if I were you this won't last'. In context a personal recommendation would be, in accordance with FSA Rules, a personal recommendation regarding a specific instrument or investment given in light of the customer's personal circumstances and investment objectives. Another hypothetical example would be 'if you are looking to realise a profit to use your capital gains tax allowance I think you should sell your position in X stock since you have held it for 5 years at a profit of £X,000 and I do not believe it is going to go any higher in the near term in light of the current recession in the X industry sector'. In my view the latter is not the case in respect of the trade conversations and transcripts that I reviewed.
(d) Context of trading advice given. For example, whether the customer has solicited the trader's views and opinions or whether the trader has independently offered the advice and presented it in such a way that it constitutes a personal recommendation to a Private Customer. … I am of the opinion that the market commentary and trading advice given by Mr Gainsley was appropriate in the light of the nature of the execution-only account relationship and contractual provisions in place and in light of the First Claimant's and Donwin's consent to being classified as Intermediate Customers in respect of the CFD Accounts and the Futures and Options Account.
160. The First Claimant contacted Mr Gainsley several times a day for a wide range of information on market facts, events, stock prices and prospects, and views and opinions. Typically any conversation would include several questions from the First Claimant making it clear that he was actively monitoring his trading positions and looking for opportunities to trade and take advantage of short term price movements.
163 Based on my review of the tapes, I have produced the following table which indicates the frequency of calls between the First Claimant and Mr Gainsley on the days cited as evidenced by the telephone tape records available for September and October 2004. Assuming that the First Claimant was a busy person, as indicated by his business interests, the number of calls is indicative of the importance that he placed on monitoring and trading his investments.
||Total No of Calls
||Calls MW to DG
||Calls DG to MW
|24 September 2004
|27 September 2004
|28 September 2004
|29 September 2004
|4 October 2004
|6 October 2004
|7 October 2004
|8 October 2004
164. The telephone conversation transcripts and telephone tapes indicate very clearly that the First Claimant is an experienced investor who is confident with technical trading and market terms and with the mechanics of dealing in and monitoring markets. The First Claimant's questions and conduct are consistent with an active investor who:
(a) Knows how to access and interpret live market data;
(b) Is familiar with trading techniques and technical terms, which he uses himself. He does not ask Mr Gainsley for explanations of trader jargon and market technical terms;
(c) Consults a wide range of sources including personal contacts and access to research reports and analyses obtained from sources other than the Defendants;
(d) Has on-line access to live market data which he consults independently and whilst speaking to Mr Gainsley;
(e) Has subscribed for on-line dealing services (the GNI Touch system) to enter trades for his own account;
(f) Formulates and implements his own trading strategies;
(g) Enters trades independently of speaking to Mr Gainsley;
(h) Enters trades himself, whilst speaking to Mr Gainsley; and
(i) Appears competent and confident in discussing markets and executing trades himself.
[Ms Robbins thereafter sets out a number of examples to illustrate those points.]
166. The Claimants' claim that certain telephone conversations are indicative of Mr Gainsley recommending to the First Claimant to buy or sell a certain stock or index. Such conversations are highlighted in bold and underlined both in the Schedules of Transcripts Volumes 1 and 2 and in this document. If the highlighted excerpts are read in isolation it may appear as if such excerpts may be a personal recommendation. However, in my opinion each conversation must be read in a broader context and take into account the following:
(a) prior telephone conversations between the First Claimant and Mr Gainsley whereby the First Claimant discussed his trading strategies and intentions openly;
(b) Mr Gainsley's knowledge of the First Claimant's trading strategies, positions and intentions gained from telephone conversations with the First Claimant, by Mr Gainsley observing the First Claimant's trading account which he was able to do on screen as they were speaking;
(c) the First Claimant's requests to Mr Gainsley for views and opinions on specific stocks and market information; and
(d) the nature of the execution-only business relationship between the First Claimant and Donwin and the Defendants as documented in the Terms of Business Agreement for the Relevant Accounts, and signed by the First Claimant.
169. … In my opinion the kinds of market commentaries and trading advice given by Mr Gainsley, as are set out in this Report and in Annex 5, are appropriate to performing the services and functions of a trader and did not amount to a personal recommendation under the applicable FSA rules for the reasons stated below.
Market Information Service
170 Mr Gainsley provided reports and observations on market prices; market reactions to news and events; prices and volumes at which stocks and indices had traded and/or were currently available for purchase or sale; trading opportunities that the market had identified; specific stock and general market buying and selling trends and events observed; and, factors and reasons impacting market sentiment, stock prices and indices.
[Ms Robbins goes on to give various examples from conversations.]
Trading Strategy Information Service
171. Mr Gainsley provided views and opinions on the First Claimant's trading ideas, strategies and positions; how the First Claimant's trading positions and strategies might be affected by market changes and events; observations on stock trading history and price charts; and, indications of the price levels at which buyers and/or sellers might react, thereby providing the First Claimant with information to assist with the implementation of his trading strategies and the monitoring and the risk management of current strategies.
[Ms Robbins goes on to give examples from the conversations.]
Trade Execution Information and Advice Service
172. Mr Gainsley provided observations, views and opinions on the timing of purchases and sales; the quantities of stocks and prices currently available in the market for purchase or sale: the available methods of execution for example in the open market or in the closing auction; trading opportunities currently available; and other factors that may influence prices, timing and trade execution capability, (for example, proximity to the New York opening). As is usual for a trade execution service, from time to time the First Claimant gave Mr Gainsley instructions to buy or sell securities in line with his trading strategies and objectives, with flexibility on timing.
[Ms Robbins goes on to give a number of examples.]
173. In my opinion the market commentaries and trading advice services that Mr Gainsley provided to the First Claimant in respect of the First Claimant's trading strategies generally and the specifics of implementation and trade execution, were consistent with the service of providing trade execution under the FSA Rules applicable at the time. The provision of market information, trading strategy information and trade execution information and advice did not amount to a personal recommendation as defined by the Rules of the FSA to the extent that:
(a) The trading information and advice was provided by Mr Gainsley in response to specific questions and advice requested by the First Claimant.
(b) The trading information and advice was provided by Mr Gainsley in the context of the First Claimant's trading strategies, existing trading positions and trading plans, which the First Claimant discussed openly with Mr Gainsley.
(c) The Account Opening Documentation and Terms of Business signed by the First Claimant and Donwin clearly indicate the nature of the business relationship as an execution-only account service with limitations on advice.
174. Had the business relationship between the Defendants and the First Claimant and Donwin consisted of an investment advisory and/or management service then there are a range of factors that I would expect to observe but I did not, including:
(a) A signed contract of agreement for the provision of investment advisory and/or management services.
(b) Unsolicited calls initiated by Mr Gainsley to the First Claimant recommending specific stocks or trades that were presented as suitable in light of the First Claimant's and Donwin's personal and financial services and investment objectives.
(c) Discussions regarding the suitability of investments, and strategies for managing risks in the portfolio, in light of the First Claimant's personal and financial circumstances and investment objectives.
(d) The giving of general portfolio advice regarding the spread of assets and investments held in the First Claimant's portfolio.
(e) Periodic portfolio reviews by the Defendants reporting to the First Claimant and Donwin on portfolio valuations and the profit and loss account for each Relevant Account.
177. … I am of the opinion that the market commentaries and advice or 'trading advice' provided by Mr Gainsley to the First Claimant were not inappropriate in light of the execution-only service, the contractual agreements signed by the Claimants, and actual conversations that took place. The conversations that I have reviewed were consistent with a trader providing a trade execution-only service and did not, in my opinion, amount to personal recommendations (irrespective of whether or not the First Claimant should have been classified as a Private Customer), presented as suitable in light of the customer's personal and financial circumstances and investment objectives."
I was properly reminded by Mr Asif QC of the formulation of the principles to be borne in mind by a judge in relation to expert evidence in the judgment of Oliver J (as he then was) in Midland Bank v Hett, Stubbs & Kemp  Ch. 384, 402, and of the adoption of that formulation by the Court of Appeal in Bown v Gould & Swayne  1 PNLR 130, 134-5. Whereas the evidence of an expert may be very helpful in showing what is established practice in a particular profession or commercial environment, the court should be wary of listening to or adopting opinions from an individual expert as to what an individual should have done, or what the expert herself would have done, in particular circumstances. It is important not to admit such opinions because they will often be, in themselves, irrelevant and may encroach upon the function of the court to determine what was or was not appropriate conduct.
I agree with the criticism Mr Asif has made of Ms Robbins' expert report (apparently her first for the purposes of contested litigation), but only in the sense that she was too ready to express "opinions". I found her summary of the way in which the relationship between a broker and an intermediate customer works in practice very helpful, in that it very much confirmed my own conclusions as to such relationships derived from interpreting the regulatory and contractual provisions to which I have referred. I wish to make clear, however, that in so far as Ms Robbins was expressing her personal opinions about the particular relationship in this case, I was quite able to put them to one side in reaching my own assessment of the situation. They happen to coincide with my own, but that is quite another matter. I saw no need to delete them from the narrative from which I have quoted above, although I recognise their status as being inadmissible opinion.
Despite that status, Ms Robbins was cross-examined on her opinions at some length with a view to encouraging her to concede that Mr Gainsley was in fact giving advice on specific positions or shares and/or making recommendations to buy or sell. Mr Asif submitted that she had, in effect, conceded this (and with particular reference to a telephone conversation on 29 September 2004). Whether this matters is open to question for the very reasons highlighted by Oliver J in the Midland Bank case. Nonetheless, for what it is worth, my own reading of Ms Robbins' evidence is rather different. Her answers have to be seen in the context of what she said, in general terms, towards the end of her cross-examination:
"I think this kind of advice … is consistent with providing a trading information and advice service but I do not consider that these types of statements by Mr Gainsley are personal recommendations to Mr Wilson. … I think that a personal recommendation really attaches to an investment advisory or an investment management relationship where the customer is looking to the firm to give them advice on managing their investments and achieving a return, and that is not the service that Mr Wilson had requested."
I would certainly not accept that either such telephone conversations as are available or any of the other evidence would support what Mr Asif described as "Gainsley's key strategic role in directing [the Claimants'] pattern of investment". Nor would I accept his alternative submission that " … he should in any event have given such advice".
There was a certain ambivalence as to the Claimants' attitude towards those telephone calls. At the outset, I was invited to regard the surviving samples as typical of what passed between Mr Gainsley and Mr Wilson. Towards the end, however, the suggestion was being made to Ms Robbins that they probably differed from the position at the beginning of their relationship. They may have come across as equals by September 2004 but, says Mr Asif QC, it is reasonable to suppose that Mr Gainsley had taken a more dominant position at the outset – which he exploited to influence Mr Wilson to adopt his day-trading active strategy. These two positions are clearly inconsistent and the impression was conveyed that the Claimants were rather making their case up as they went along.
(xiv) The significance of the statutory background for allocation of risk
Mr Smith has made a wider policy point about how the statutory regime is supposed to work as to a reasonable and fair allocation of risk between customers and brokers. By reference to the wording of COB 5.3.5R, he suggests that it is intended to achieve this by providing, where it can be shown that a particular recommendation has not been "suitable", that it will be possible to identify the losses flowing from that quite specifically.
What is sought to be achieved here, on the back of this very specific wording, is a claim in respect of all losses (however those are to be quantified) over the period of trading on the relevant accounts. (The irony is, however, that the Claimants do not seek to establish in relation to any specific recommendation of a particular transaction that Mr Gainsley gave advice that was defective.) Such an outcome would bring about a result unforeseen by those who formulated this carefully drawn remedy and, it is said, quite contrary to the carefully struck balance of risk. I agree that the Claimants' interpretation is counter-intuitive.
(xv) The Claimants' argument on medium to longer term trading
I go on to address the hypothesis that Mr Gainsley had indeed been making personal recommendations. What would be involved in establishing a breach of COB 5.3.5R? The Claimants appear to suggest that Mr Wilson's strategy (frequent day-trading in derivatives) was unsuitable both for him and for Donwin and that the Defendants had failed to take reasonable steps to ensure that any personal recommendation was suitable for their clients. It was, on the other hand, never suggested that trading in those particular products was inherently unsuitable. It is put on the basis that Mr Gainsley should have given general advice on strategy, to the effect that positions should only have been opened with a view to longer term holding – for, say, between two and six months. Yet Mr Gainsley's evidence was that during his introductory telephone conversation, on or about 14 July 2003, Mr Wilson explained that his favoured strategy was to trade frequently in and out of single stocks. I see no reason to reject that evidence. This was consistent with his established pattern of activity beforehand. What is more, it was not inconsistent with the stated objectives filled in on the Defendants' documentation by Mr Wilson's then secretary.
This is a matter addressed by Ms Robbins and she expressed her conclusion as follows:
"125. As a Compliance Officer experienced in reviewing customer applications to open securities and derivatives accounts I would expect any customer intending to trade CFDs, short term futures and options contracts and/or spread betting daily, as referred to in the Account Opening Documentation completed by the First Claimant and Donwin, to have investment objectives that included speculation, trading, short term investment and/or hedging type investment objectives; to have the financial means and appetite to risk capital with a view to achieving higher returns; and, to have the financial means to bear losses, if incurred. For example, trading in CFDs, short term futures and options contracts and/or spread betting would be consistent with the aforementioned kinds of investment objectives but would not be consistent or compatible with an investor who wanted to achieve income or medium to long term capital growth or who had no appetite, or could not afford, to risk his investment capital and savings.
126. For these purposes, I believe the stated investment objectives did show that the First Claimant and Donwin were seeking to trade and speculate with a view to making a profit within a short time frame for investment purposes. They pointed to a one year investment period, which I would regard, in the context of trading financial instruments, as a short term horizon. I would also have taken into account the fact that the stated investment objectives of the First Claimant and Donwin appear to be consistent with the type and frequency of trading they had done before as indicated by the information provided in the Account Opening Documentation for the CFD Accounts and the Futures and Options Account in respect of their prior investment experience and frequency of trading. That experience included daily trading of significant quantities.
138 My conclusion is that any investor seeking a profit with a one year investment horizon by trading shares and derivative products such as CFDs, futures and options and spread betting, would be focusing on short term investment strategies including frequent trading and that a strategy of frequent trading will not in itself necessarily lead to losses, although clearly it would contribute to losses, if the short term trading and investment decisions were not profitable. The investment objectives as stated by the Claimants are not, in my opinion, inconsistent with short term frequent trading in CFDs, futures and options and spread bets."
Nothing has been produced convincingly to demonstrate that the longer term trading now postulated on the Claimants' behalf was the "right" strategy for them to have adopted at July 2003. With the benefit of hindsight, they have constructed a model which appears to show that, if this strategy had been adopted and rigorously followed, it would have led to a more profitable outcome. This is an example of the tail wagging the dog. It does not establish why that was the strategy to be adopted at the time.
Furthermore, the longer term strategy was alien to Mr Wilson's personal inclinations and I see no reason to assume that he would have been persuaded from his objective if Mr Gainsley had, for some reason, decided to proffer such advice. As I have said, this was regarded by Mr Avey as an unusual approach to derivative trading. It is, therefore, highly unlikely that it would have seemed to Mr Gainsley or his supervisor an appropriate course to recommend.
(xvi) The supposed lack of risk warnings
I should deal separately with the allegation that there was a failure to offer risk warnings contrary to COB 5.4.3R (set out above). This does not, of course, arise in the light of my ruling that the Defendants were entitled to classify the Claimants as "intermediate", since it clearly only applies in the case of "private customers". But I should nevertheless address the arguments.
The rule is only brought into play if a "personal recommendation" is made (which, as I have already held, was not the case) or if it can be said that the Defendants arranged (brought about) or executed a deal in a warrant or derivative. This could only occur if one of the Defendants' traders keyed in a trade. This did sometimes happen on the CFD and spread betting accounts, but there is no evidence of it with regard to futures and options.
As to the CFDs and the futures and options accounts, it is a complete answer that the Claimants were not wrongly classified. No personal recommendation was made either. It is accepted, however, that on the CFD accounts there were examples of one of the Defendants' traders keying in trades. Therefore, if I am wrong about the classification issue, there would be a legitimate complaint that the Claimants were not provided with the FSA risk warning notice and that there would have been a breach of COB 5.4.3R.
No such claim arises in relation to spread betting, even though the Claimants were "private customers" for this purpose, because the risk warning notice was indeed provided, as I have already recorded.
Assuming for the moment a breach or breaches of COB 5.4.3R, in the context of the CFD accounts, how would the Claimants establish causation of the alleged loss? The answer is to be found in Mr Wilson's own evidence, during which he made it clear more than once that he would not have troubled to read such warning notices. He knew the risks in any event. He simply cannot, therefore, discharge the burden of proof in relation to this part of the claim.
(xvii) The alleged breaches of COB 2.1.3R
I believe that the final point taken by the Claimants on the regulatory framework relates to COB 2.1.3R, which applies irrespective of customer classification:
"When a firm communicates information to a customer, the firm must take reasonable steps to communicate in a way which is clear, fair and not misleading."
Reliance is placed on this provision in the context of transaction costs which, of course, played a significant part in the losses incurred. The reason why it is said that the information on this topic fell short of the required standard is that the Defendants did not communicate that frequent short term trading would erode the Claimants' capital: see paragraphs 67-68 of the re-amended particulars of claim. In other words, the Defendants did not state the obvious. The provisions, however, do not impose or create a duty to advise or communicate on any particular subject: see Maple Leaf Macro Volatility Master Fund v Rouvroy  EWHC 257 (Comm).
Incidentally, the unreality of the suggestion that Mr Wilson did not understand the impact of commission and dealing charges is illustrated not only by his driving of hard bargains on competitive charges, but also by an observation to Mr Gainsley on 29 September 2004. He was accepting that he was "a couple of grand up" on the day's trading, but added " … maybe a bit more but [by] the time you fuckers have had out your extortionate fees . . . ". He was only too well aware of the position.
(xviii) The claims made outside the regulatory regime
I should now turn away from the regulatory claims and briefly consider those based on common law.
I was invited to consider the judgment of Gloster J in this context in the recent case of JP Morgan Chase Bank v Springwell Navigation Corporation  EWHC 1186 (Comm). Her Ladyship was there addressing, inter alia, whether or not frequent dealings over the telephone between a particular bonds salesman and Springwell could in themselves give rise to the kind of duties that would have attached to an investment adviser. She came to a decision very much on the facts of that case (as she made clear at ), but she addressed certain considerations that might be thought of general relevance when such issues fall to be determined. She made reference, for example, to what she called "the indicia of an advisory relationship": see at  et seq. These reflected closely some of the factors identified in the present case by Ms Robbins, such as the regular provision of portfolio statements, discussion about the client's investment objectives, and express references to or assertions of such a relationship. As she put it, " … the fact that no articulation of the existence of the alleged advisory agreement or obligation was made, until such a very late stage, may justifiably be regarded as counter-indicative of its existence over the previous many years".
Her Ladyship also recognised, at , the need to draw, and have in mind, a clear distinction
" … between the investment adviser, properly so-called, who is retained to advise a client, usually backed by considerable research, in relation (for example) to the investments which a client should make, the structure of the investment portfolio, asset allocation and diversification, and the advice or recommendations given by a bonds salesperson such as JA, as part of the selling process, who was actually trading and:
Here, of course, the circumstances were rather different. Mr Gainsley was not, for example, a "bonds salesperson". Nonetheless, he was making comments or judgments in a relatively volatile environment "based on prices on screens many times a day". It is also clear that at no stage were the Defendants retained to advise the Claimants in relation to investments they should make, the structure of their portfolio, or how they were to devise their strategy for trading in derivatives. Furthermore, applying the test Gloster J articulated at , the fact that Mr Gainsley expressed his views from time to time about the market, or particular opportunities, would not " … amount to an assumption of responsibility on the part of [the Defendants], so as to bring into play the full range of obligations of an investment adviser … ".
' … dealing with markets in a volatile environment that requires that they make decisions based on prices on screens many times a day.' "
I referred earlier to the pleaded argument that certain obligations should be implied in the contractual relations between the parties. These suggested terms seem to me, however, to fail the stringent tests that are applicable to any such arguments. The implications contended for would be neither necessary nor consistent with the express terms agreed between the parties. No arguments were developed in support of this case during the course of submissions at trial.
(xix) The alternative reliance on exemption clauses
In so far as the Claimants relied on the common law, the Defendants pleaded exemption clauses in the contracts, as identified at paragraph 48.2.7 of the amended defence dated 23 July 2010. In response, the Claimants have claimed in paragraphs 13-16 of the amended reply dated 30 July 2010 that these are inconsistent with the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 and should not be open to the Defendants. Mr Smith submits, however, that the argument should be rejected, since Mr Wilson is and was at all material times intelligent and sophisticated: see the Defendants' amended further statement of case dated 6 August 2010. He was well able to look after himself, as was illustrated, for example, by his hard bargaining on commission rates.
It is said that the Claimants were dealing with the Defendants as "consumers" and that it would thus be for the Defendants to satisfy the test of reasonableness. As to the regulations, reliance is placed on the fact that the contractual terms were drafted in advance, that the Claimants were unable to influence their substance, and that they gave rise to a significant imbalance to the Claimants' detriment. It is accordingly submitted that those provisions are unfair within the meaning of Reg 5 and not binding upon the Claimants.
By way of response, in their pleading of 6 August 2010, the Defendants argue that:
i) the Second Claimant should not be regarded as a "consumer" for the purposes of the Regulations, since (a) it is not a natural person and (b) was at all material times acting in the course of a "trade, business or profession";
ii) Mr Wilson would not qualify as a "consumer" in his capacity as a trustee;
iii) the provisions relied upon in their various standard terms and conditions are all in plain, intelligible language and fall within Reg 6(2);
iv) none of the contractual terms on which the Defendants rely causes a significant imbalance or is contrary to the requirement of good faith.
The Defendants go on to highlight a number of particular aspects of their dealings with the Claimants, each of whom they describe as "commercially sophisticated and experienced in matters of business". They contend that they dealt openly and fairly with them, affording the opportunity to consider the provisions and, if thought appropriate, to take advice on them before signing. Moreover, all this took place in the context of the Claimants choosing to trade in volatile financial markets and products. It was thus fair and reasonable for the Defendants, in general terms, to seek to restrict their own liability in the event that such trading on the Claimants' part resulted in losses. Furthermore, the individual contractual provisions by which they sought to achieve this are said in themselves to be fair and reasonable. I need not set them out individually in this judgment. They are approached compendiously in the pleadings and I shall adopt the same approach.
Against the background rehearsed earlier in this judgment, I regard the Defendants' submissions on these matters as well founded and I uphold them.
(xx) Did Mr Gainsley trade on a discretionary basis and/or trade without authority?
Another example of the Claimants' case metamorphosing as they went along is provided by the stance, taken at trial, that Mr Gainsley was trading on the Claimants' behalf on a discretionary basis. This was not reflected in their pleaded case, which had hitherto included the proposition that in certain circumstances he had traded without authority. Either he had authority to trade on a discretionary basis or he did not. Had this truly been the position, I would expect to have seen it pleaded and an explanation offered as to how, when and why this change in the relationship came about. As it is, it seems to me to be just an example of last minute ingenuity.
As to the alternative case, that Mr Gainsley was on some occasions dealing in the Claimants' names but without authority, I reject that as being wholly implausible. It would have been quite inconsistent with the way the accounts were conducted and with the contractual basis of the relationship described above. There were occasions when Mr Gainsley traded for Mr Wilson which were briefly explored in the course of evidence (some pleaded and others not). For example he was asked about some Amvescap shares purchased on 4 October 2004. It is submitted that in the absence of any taped record of the specific authorisation, I should disbelieve him and conclude that he did indeed take decisions and trade on his own initiative. Mr Gainsley himself, who I found to be a straightforward and truthful witness, said that he would not have done so without Mr Wilson's authority. Given the tight rein that Mr Wilson kept over his transactions, it would have been quite inconsistent with this relationship for Mr Gainsley to have gone off on a frolic of his own. He said that he would have only invested on Mr Wilson's behalf if he had been asked to do so. I find that completely credible. I am certainly not prepared to accept Mr Asif's suggestion that he was a "brazen" liar.
The fact that now, after all these years, Mr Gainsley cannot remember the terms of any such request, or that there is no record of the relevant telephone call, is by no means surprising. In these circumstances, Mr Gainsley could only speculate. He suggested various possibilities, which included Mr Wilson having contacted him on his mobile (which he did from time to time) or having called him on another line while he was away from his desk. I do not need to make a finding as to how such instructions would have been given to Mr Gainsley, on any particular occasion. What matters is that I accept his evidence that he did not, and would not, deal without authority on behalf of either Mr Wilson or Donwin.
Moreover, I do not accept that anything in Mr Sparkes' evidence was necessarily inconsistent with that of Mr Gainsley. He acknowledged, of course, that the Defendants' policy was that calls should not be taken other than on taped telephone lines and, specifically, that it was not acceptable to take instructions on a mobile. Yet general policies are not always rigidly adhered to and if a client should contact a broker on his mobile it might well be thought unrealistic to insist that he ring back on a taped line. As Mr Gainsley put it, " … we would continue the conversation because there was no point in him calling me back".
If I had come to the conclusion that the Claimants were entitled to recover in respect of unauthorised trades, it would be for them to demonstrate that the net result of such trading was adverse. If some of such trades resulted in favourable outcomes, surely credit would have to be given.
(xxi) The lack of contemporaneous complaint
A further argument is raised on the Defendants' behalf by reference to paragraph 60 of the amended defence. The claim would not be permitted under the contractual arrangements given that no contemporaneous complaint of unauthorised trading was ever made. It is a valid point to take, since no such complaint was raised until a solicitors' letter of 13 May 2005.
(xxii) The alleged failure to notify of market movements
There is a separate claim (quantified at £16,725 in respect of 1 February and at £30,750 for 23 February 2005). This is founded upon the complaints that the Defendants failed to keep an eye on market movements and/or to take steps to notify Mr Wilson of certain market movements. It is said that if such failures had not occurred Mr Wilson would have closed out certain positions more favourably. Yet the Claimants have not been able to establish any such obligation, whether by reference to written contractual terms or to specific obligations undertaken by any individual employee(s).
Furthermore, there are specific provisions that preclude any such claim. These are to be found at clause 15.3 of the CFD Terms of Business, clauses 12.1.2, 30.2.2(c) and (f) of the Intermediate Customer Terms of Business and clauses 22.3(iii) and (vi) of the Spread Betting Terms of Business. Mr Asif raised the argument that the Defendants would not be entitled to pray in aid such contractual terms because the arrangements the Claimants rely upon were reached with individuals for whom the Defendants would be vicariously liable. I do not follow this point, however, since where any contract binds a corporate entity the terms can only have been negotiated or entered into by human agents on its behalf. That plainly does not mean that exemption clauses cannot be relied upon.
Mr Asif placed particular reliance in this context on the evidence of Mr Beckerleg. He referred in cross-examination to a telephone conversation at just after 7.30 a.m. on 23 February 2005. There was a football match in the offing and it seems that Mr Wilson was asking Mr Beckerleg to keep an eye on the market, while he was incommunicado, with particular reference to his Standard & Poor's position. He asked him to "get [him] out even on that" and "soak up all the profit" whenever he could. Mr Beckerleg could not recall the conversation or why he responded "OK" to this request – rather than saying, for example, "I am not allowed to do that". It was then put to him that, having undertaken such a commitment, he had simply forgotten what he had agreed to do. Mr Beckerleg, having no recollection, was unable to throw any further light on the matter. I am not able to extract a binding and enforceable contractual obligation from such thin material.
In any event, the Defendants argue that this case would fail on causation. Mr Wilson's case is that he would have closed out his short S & P positions at 1192 if he had been given updates, as he was entitled to expect. In the event, however, he had the opportunity to close at 1190.5 the next day – and in fact chose to increase his short exposure.
Similar causation problems would arise in relation to Mr Wilson's complaints relating to 1 February 2005 in relation both to the FTSE Daily Cash index and the Wall Street March 2005 index. In the former case, he did not take opportunities to close out at 10.43 a.m. and 12.28 p.m. when the market was lower than 4866 – the level at which he claimed he would have closed out. As to the latter, a conversation took place with Mr Gainsley at 1.13 p.m. during which it emerged that Mr Wilson had not decided what to do.
(xxiii) The Defendants' plea of contributory negligence
Since I reject the Claimants' case, in all its manifestations, there is no need for me to go on to consider the case on contributory negligence pleaded at paragraph 62 of the amended defence. It would be artificial and hypothetical for me to do so, since I would have to conjure up circumstances which never happened and speculate as to how the parties would or should have reacted.
(xxiv) The Claimants' case on quantification of loss
Nevertheless, it is right that I should address the arguments raised on quantification of loss in a little further detail in case I am wrong on the issues of liability. It is necessary to have in mind, in doing so, that the burden rests on the Claimants and that the court should avoid pure speculation.
The formulation of the major part of the Claimants' case has mutated and by the end of the case depended in large measure on a report introduced from an accountant, Ms Moira Hindson, to which she had most likely devoted much time and effort. The calculations she was asked to make, however, were based on certain hypotheses supplied to her by Mr Jones. It is thus on the validity of these various scenarios that the value of her report must largely depend.
As I have already pointed out, it became a significant part of the case that the Defendants should have at some early point advised the Claimants to trade in these products only on a relatively long term basis; that is to say, they should have been acquired with a view to being held for several months. It is difficult to see why such advice should have been given. First, Mr Wilson was at no stage asking for advice on strategy. Second, no one at the Defendants would have advised him to approach these products in what would be a very unusual manner (as Mr Avey made clear). Third, Mr Wilson would have been highly unlikely to take such advice if it had been offered. It would have been inconsistent with his established modus operandi and personal inclinations. Nevertheless, Ms Hindson's calculations are based on the supposed differences between what actually happened and what would have happened if he had traded much less frequently. They provide models for what might have happened if the Claimants had traded after various longer or medium term intervals.
What is more, the focus has been not so much on actual or possible market movements in the products but rather upon commissions and other charges. This was a deliberate choice, as explained by Mr Asif. He said that the model consciously avoided considering the profit and loss accounts because of the impossibility of trying to recreate the Claimants' trading strategy after the event, which would involve the use of hindsight as to market movements. It had been decided to focus on the suggested reductions in commission, interest, financing charges and spread – thus avoiding consideration of detailed trading decisions. The loss was therefore put at between £966,786 and £1,010,642 depending on the findings of the court.
As so often happens with theoretical hypotheses, they tend to part company with reality. The reason why it is said that trading in the products should have been so much less frequent is that Mr Wilson's actual strategy was too risky to match his investment objectives. Yet the risk of market movements does not seem to play a role in the calculation of what is said to be the consequential losses. As Ms Hindson explained at the close of her evidence, " … the risk element is not material to the exercise I was performing". She agreed that her model was designed simply to explore the cheaper commissions and spreads on the hypothesis of less frequent trading.
Ms Hindson's model makes an assumption that the Claimants would each hold at the same time both long and short positions in the same stock, giving rise to a notional risk exposure of some 2 per cent. Yet, as Mr Jones accepted, there would be no point in "a long and a short CFD together". What I, therefore, failed to grasp is what was the point in the hypotheses fed into Ms Hindson's calculations.
Towards the end of his re-examination, Mr Jones was asked whether it was possible reliably to recreate the way in which the Claimants might have traded if classified "correctly" as private customers (that being one of the Claimants' primary contentions in this litigation). The answer was not entirely clear, but seemed to me to amount to the answer that such a model could have been created – but no one had so far attempted to do it:
"Well, you wouldn't be able to calculate … I mean, the spreads are just the best estimates, I think, that could be made, based on the information provided from Fidessa spreadsheets, but certainly you could model the length of time that CFDs could have been held for and calculate the amount of commission, the amount of long interest, the amount of short rebates. The likelihood of dividend payments would have to come in if holding CFDs for a longer time. So you would have to factor in your credits, your notional dividend credits and your notional dividend debits. But, yes, it is certainly possible to model that."
What emerges from this answer, on the last day of evidence, was that somebody somewhere might possibly be able to calculate the losses supposedly suffered by the Claimants' classification as intermediate customers. But this work had not yet been done. Thus, it seems to me, at the end of the trial, the Claimants upon whom the burden of proof clearly rests have failed to prove any of the unquantified elements of their losses flowing from the alleged breaches.
(xxv) The final outcome
In the result, the claims will be dismissed and judgment entered for the Defendants.
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