Bank Leumi (UK) Plc v Wachner

In an execution-only foreign exchange relationship, informal trading-floor opinions do not create a general advisory duty. A contractual exclusion of advice is displaced only by a specific agreement that the bank will advise on the merits or suitability of investments. Regulatory client classification rules require reasonable care in the classification process, not an objectively correct classification. Under COB, the relevant inquiry is whether reasonable steps were taken to assess experience and understanding. Under COBS, reclassification duties arise when the firm becomes aware that the initial conditions are no longer fulfilled. A bank acting as agent for an overseas bank is not thereby providing regulated investment services to the customer as its own client. Loss must still be caused by the breach alleged.

Bank Leumi (UK) plc claimed €13,434,947.98 from Linda Wachner following the close-out of foreign exchange option positions. Ms Wachner counterclaimed for breach of statutory duty, negligent misrepresentation and breach of duty of care.

The dispute concerned her classification as an intermediate customer under the FSA Conduct of Business Rules and later as an elective professional client under COBS. It also concerned reverse knock-in options, the operation of an arrangement under which she traded with Bank Leumi USA through Bank Leumi UK, alleged advice about rolling or pushing out options, and the effect of contractual execution-only terms.

The central issues were whether Bank Leumi UK was her contractual and regulatory counterparty during the agency arrangement, whether it had breached the applicable rules or assumed a duty to advise, and whether any breach caused her loss.

1. Agency arrangement. Bank Leumi UK acted as agent for Bank Leumi USA when dealing with Ms Wachner. She acted as principal, and the relevant option contracts were between her and Bank Leumi USA. The documents, the sequence of trades, the pricing information and the restrictions imposed by Bank Leumi USA supported that analysis. The individual traders’ understanding of the arrangement could not determine its legal character.
2. Misrepresentation and duty of care. The statements that reverse knock-in options were less risky than equivalent vanilla options and that margin had ordinarily been calculated on one side were accurate descriptions of the position at the time. Statements about pushing out options were, at most, cash-flow descriptions. The complaint that the bank had failed to explain embedded costs and increasing risk was a failure-to-advise case, not misrepresentation. No actionable misrepresentation was established.
3. Clause 6.16 of the bank’s Terms of Business created a contractual estoppel unless there was a specific agreement to advise. Neither the Claridge’s meeting, the 21 December 2007 telephone call nor later conversations amounted to such an agreement. The traders’ recommendations were trading-floor opinion at the lower end of the advisory spectrum, not personal recommendations or an assumption of a general advisory duty. During the Bank Leumi USA arrangement, the contractual relationship also left no basis for imposing on the agent a duty not imposed on its principal.
4. Classification under COB. Section 150 of the Financial Services and Markets Act 2000 made contravention of an applicable rule actionable. COB 4.1.4R and 4.1.9R required reasonable steps and reasonable care in classifying a client, rather than an objectively correct classification. COB 4.1.10G provided guidance and did not require every listed criterion to be satisfied. Bank Leumi UK had taken reasonable care in 2005, and the classification was valid.
5. The annual review obligation under COB 4.1.15R was not triggered during the dormant period or the Bank Leumi USA agency trading, because Ms Wachner was not then Bank Leumi UK’s client for the relevant regulated business. The transitional “grandfathering” provisions validly permitted her treatment as an elective professional client under COBS. COBS 3.5.9R required actual awareness that the initial conditions were no longer fulfilled. That awareness was not established in September 2008.
6. The other COBS allegations failed. The relevant provisions either applied only to retail clients, were inapplicable because Ms Wachner was not Bank Leumi UK’s client during the agency arrangement, or were not engaged by trading-floor opinion in an execution-only relationship. Any breach would in any event have faced fatal causation difficulties, since Ms Wachner would probably have continued trading.
7. The counterclaim failed. Ms Wachner remained liable to Bank Leumi UK for €13,434,947.98, with interest and consequential matters to be addressed further.