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

The court addressed whether the Financial Ombudsman Service had jurisdiction to hear a complaint about management of a foreign exchange trading account under s.226 of the Financial Services and Markets Act 2000. The determinative question was whether rights under the contracts between the client and London Capital fell within article 85(1) of the Regulated Activities Order (contracts the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in value) and, if so, whether they were excluded by article 85(2)(a) on the ground that profits or losses were intended to be secured by delivery.

The judge held that the contractual relationship created by the written Terms was not a mere execution-only agency arrangement. Because the client did not provide settlement funds, was only required to provide margin, could not require delivery of sums credited on settlement, and positions had to be closed (or rolled over), the rights under the contracts between London Capital and the client were distinct investments whose dominant purpose was speculative profit or loss by reference to currency fluctuations. The judge further held that the exclusion in article 85(2)(a) did not apply: crediting and debiting sums to the account did not amount to delivery of the relevant property for the purposes of the article.

Background and parties: The claimant, London Capital Group Limited, operates foreign exchange trading accounts. A client, Mr Shrubb, complained to the Financial Ombudsman Service in May 2011 alleging mismanagement of his forex account opened 22 June 2009. The Ombudsman decided the trading involved regulated contracts for differences and that the FOS had jurisdiction. London Capital sought judicial review of that jurisdiction decision.

Nature of the application: Judicial review seeking to quash the Ombudsman’s decision that the FOS had compulsory jurisdiction under s.226 FSMA because the dealings were in investments of a kind specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO), in particular article 85.

Procedural posture: Permission to proceed was initially refused on the papers but later granted on an oral hearing. The Financial Conduct Authority and the client were joined as interested parties; they did not participate in the hearing.

Issues framed by the court:

• Whether rights under the contracts between London Capital and Mr Shrubb were investments within article 85(1)(b) of the RAO (contracts the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in value).
• If so, whether those rights were excluded from article 85(1) by article 85(2)(a) because the parties intended profits or losses to be secured by taking delivery of the relevant property (currency amounts).
• How the contractual relationship should be characterised: a simple execution-only agency or a different arrangement that created distinct rights and liabilities.

Court’s reasoning: The judge analysed the written Terms and the practical operation of the account. He identified three interrelated features that distinguished the arrangement from a pure execution-only service: (i) positions had to be closed (or would be rolled over) so the client’s choice was limited largely to timing; (ii) London Capital provided settlement funds so the client only provided margin rather than the settlement amounts; and (iii) clause 10.3 and the Terms prevented the client from requiring delivery of sums credited on settlement to transfer them away from the account. Those features meant the client obtained contractual rights and liabilities distinct from the underlying spot forex contracts with bank counterparties and that the dominant purpose of those rights was speculative profit or loss by reference to currency movements, bringing them within article 85(1)(b).

On the article 85(2)(a) exclusion, the judge adopted an objective construction of intention and of 'delivery'. He concluded that mere crediting or debiting of sums to the client’s account did not amount to delivery of the relevant property within article 85(2)(a). The passage from Larussa-Chigi was read as distinguishing mere accounting entries from transfers effected by novation between bank accounts; the present arrangements were in substance settlement of differences rather than actual delivery between parties.

Conclusion: The court upheld the Ombudsman’s conclusion that the FOS had jurisdiction because rights under the contracts between London Capital and Mr Shrubb were specified investments under article 85(1) and not excluded by article 85(2)(a).

The claim for judicial review is dismissed. The court held that rights under the contracts between London Capital and its client were investments within article 85(1) of the RAO and were not excluded by article 85(2)(a); accordingly the FOS has jurisdiction under s.226 FSMA to consider the complaint.

Not an appeal. Permission to bring judicial review was initially refused on the documents by Haddon-Cave J on 22 October 2012; permission was later granted on 31 January 2013 by Foskett J after an oral hearing. The Financial Conduct Authority and the client were joined as interested parties.