Laura WilesThe High Court rejected the arguments of a defendant who alleged that a claimant spread betting firm had contravened COBS by reclassifying him from a retail client to an elective professional client (EPC), meaning he no longer benefitted from certain protections for retail customers under COBS,
The defendant, Mr Tchenguiz, had opened a spread betting account with the claimant, IG Index Ltd, as a retail client. On the same day he successfully applied to be recategorised as an EPC. In doing so, he confirmed his understanding that EPCs do not receive certain protections afforded to retail clients, including negative balance protection (NBP), which would operate to prevent the retail client from losing more funds than were currently in their account.
Mr Tchenguiz later incurred substantially losses on his account due to a considerable decline in the share price of a listed transport operator during the COVID-19 pandemic, in respect of which he had made numerous bets that the share price would rise. When his account was closed, Mr Tchenguiz failed to pay the close out balance of £6.5 million.
The recategorisation argument
When IG Index brought a claim against him for the sums due, Mr Tchenguiz denied liability on this basis that the claimant had not complied with the recategorisation rules under COBS 3.5.3R and 3.5.6R, such that he remained a retail client, benefitted from NBP under COBS 22.5.17R, and did not owe the debt.
The court rejected this argument, concluding that IG Index had complied with the COBS rules in recategorising the defendant as an EPC. In particular, it had taken all reasonable steps to ensure he met the qualitative test – requiring an assessment of the client’s expertise and experience to ensure they are capable of making investment decisions and understanding associated risks – and the quantitative test – here, requiring the client to have worked for at least one year in a professional position of the financial sector.
The negative balance protection argument
In light of the above, the defendant could not succeed on his NBP argument. However, the Court considered the position if Mr Tchenguiz had succeed in his recategorisation argument, and whether a contravention of the associated COBS rules on this and NPB would make the transactions void or unenforceable.
To Court highlighted section 138D(2) FSMA, which gives an individual a private right of action to pursue a firm for breaching an FCA rule, and section 138E, which limits the effect of such rule breaches. Although the recategorisation rules fell within the section 138D(2) meaning, section 138E(2) stated that a rule breach would not make a transaction void or unenforceable, subject to certain exceptions, none of which were applicable on the facts. The same line of argument applied to the alleged NPB rule breach.
Therefore, the defendant’s only available defence would have been via a counterclaim for damages in respect of the breaches, as per section 138D.