London Capital Group, R (On the Application Of) v The Financial Ombudsman Service Ltd

For the purposes of article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the purpose and intention of the parties are determined objectively from the contract and its factual setting. The relevant purpose is ordinarily that of the customer dealing with the regulated firm. A dominant speculative purpose is sufficient, even if the contract has subsidiary purposes.

An arrangement is not a simple execution-only service merely because its terms describe it as agency. Where the customer must provide only margin, positions must be closed or rolled over, and currency amounts cannot be withdrawn or transferred, the contractual rights may themselves constitute investments for the purposes of article 85(1). Mere credits and debits to the customer’s account do not amount to delivery under article 85(2)(a) where only net profits are withdrawable.

London Capital Group operated a foreign exchange trading account for Mr Shrubb. After Mr Shrubb complained to the Financial Ombudsman Service about the management of the account, the ombudsman decided that the trading involved regulated contracts for differences and that the FOS therefore had jurisdiction.

London Capital sought judicial review. It argued that the relevant contracts were spot foreign exchange contracts executed as agent, or alternatively that the currency was delivered so that the exclusion in article 85(2)(a) applied. The central issues were whether the contractual rights between London Capital and its client were investments within article 85(1), and whether the delivery exclusion applied.

1. Jurisdiction and disposition. The claim for judicial review was dismissed. The FOS had jurisdiction under sections 22 and 226 of Financial Services and Markets Act 2000.
2. Purpose under article 85. The purpose and intention of the parties had to be ascertained objectively by construing the contractual terms in their factual setting. Where a contract had several purposes, a dominant purpose of securing a profit or avoiding a loss by reference to currency fluctuations was sufficient. The relevant purpose was that of the customer, not necessarily that of the firm or other participants.
3. Nature of the contractual rights. The spot contracts with bank counterparties were excluded from article 85 because the currencies were delivered. The separate contractual arrangements between London Capital and Mr Shrubb were different. They required positions to be closed or rolled over, required margin rather than settlement funds, and did not permit delivery or withdrawal of the currency amounts traded. Those features meant that the arrangement was not a simple execution-only agency service. The rights acquired by the client were distinct investments whose purpose was speculation on currency movements.
4. Delivery. Crediting and debiting the client’s account did not constitute delivery for article 85(2)(a). Delivery required physical transfer or transfer to another account, involving discharge and replacement of the relevant debt. The account arrangement instead provided for settlement of differences, since the client could withdraw only any net profit and was not required to pay the currency amount debited.
5. Factual error. The ombudsman had inaccurately described the account as recording only net profits or losses. The account was in fact credited and debited with all currency amounts bought and sold. The error was immaterial because it did not alter the practical effect of the arrangements or the absence of delivery.

The FOS adjudicator initially considered that it had jurisdiction. On referral, the ombudsman reached the same conclusion. Permission for judicial review was ultimately granted, and the Administrative Court dismissed the claim.