Court holds FOS entitled to uphold complaint against investment firm for incorrect EPC categorisation

The Court of Appeal has held that the FOS was entitled to uphold a complaint made by an individual client against an investment firm, where the client had made losses after investing in contracts for difference (CFDs) but the firm had failed to undertake an adequate assessment of the client before categorising him as an elective professional client (EPC).

The complainant had an investment portfolio worth approximately £800,000 and a net worth of approximately £2.2m, and had invested £100,000 in a managed investment account strategy for professional investors involving trading CFDs, even though he had no experience of trading in derivatives.

Under FCA rules in COBS, a firm may treat a client as an EPC if they undertake an adequate qualitative assessment of the individuals expertise, experience and knowledge such that they are satisfied the client is capable of making their own investment decisions, as well as a quantitative test relating to the client’s portfolio, periods of relevant work in the financial sector, and the size of their transactions.

At the outset when requesting EPC classification, the complainant wrongly indicated that he had experience of CFD trading, claiming that he had invested for more than 15 years in blue chip stocks. He had not attached supporting evidence to support this classification, but the company proceeded to classify him as an EPC.

The Court said that if the documentation had been properly completed with evidence, this might have been an unambiguous representation about his CFD trading experience which would provide the assurances necessary for Linear Investments to satisfy the COBs tests. However, the missing evidence of CFD trading was an important omission, which suggested he might not understand the difference between CFD trading and convention trading in stocks and shares, and that perhaps the rest of his answers were not accurate. The Court highlighted the firm’s status as a regulated entity, and its positive duty to make careful assessments.

Overall, the FOS had been right to conclude that Linear Investments was put on further inquiry and was not entitled to simply rely on the answers given by the complainant in classifying him as an EPC. However, the FOS had erred in its approach to contributory negligence in its compensation award, so the Court remitted the case back to the FOS so that it could make an appropriate reduction.