CMC SPREADBET PLC v ROBERT TCHENGUIZ

A spread-betting firm may classify an experienced trader as an elective professional client where it gives clear written warnings about the protections lost and obtains the required written acknowledgments. The adequacy of warnings is assessed objectively, but the client’s knowledge and experience may provide important context.

Where a client fails to fund a margin deficit, the contractual discretion to close out is subject to the Braganza rationality duty. The court reviews the decision-making process and outcome for good faith, rationality and absence of arbitrariness; it does not substitute its own view. In such a liquidation, the firm may consider its own interests. The client best-interests rule in COBS 2.1.1R does not apply to liquidation following failure to meet a margin call.

CMC Spreadbet Plc claimed £1.31 million from Robert Tchenguiz in respect of losses incurred on a spread-betting account relating to FirstGroup shares. The positions were closed during exceptional market volatility in March 2020, leaving a negative account balance.

The defendant argued that CMC had failed to comply with the FCA’s client-categorisation rules, so that he should have retained retail-client protections, including negative balance protection. Alternatively, he argued that CMC had exercised its contractual close-out discretion irrationally, breached the duty to act in the client’s best interests, or was subject to an implied term requiring compliance with reasonable market practice.

1. Professional-client categorisation. CMC complied with COBS 3.5.3R(3). The Request Form, Terms of Business, Risk Warning Notice, Opt-Up Agreement and subsequent communications clearly warned that professional-client status involved loss of retail protections, including negative balance protection. The warnings were sufficient when considered together and in the context of the defendant’s substantial experience and prior professional-client classifications.
2. The requirement that the client acknowledge the consequences in a document separate from the contract required a pragmatic approach. The Opt-Up Agreement was signed before the account was accepted and activated, and before trading began. The defendant therefore acknowledged the warnings before the contractual relationship operated on the professional terms.
3. Close-out discretion. The Braganza duty required CMC to act honestly and in good faith, take relevant considerations into account, exclude irrelevant considerations, and reach a result that was not irrational or perverse. The threshold was high and the court was not entitled to substitute its own assessment for CMC’s decision.
4. CMC rationally decided to close out after allowing time for funding proposals. The proposed third-party security was vague, illiquid, conditional and incapable of promptly satisfying the contractual obligation to fund the account. CMC was not required to speculate on a recovery in the share price, coordinate with other spread-betting firms, or delay close-out in the hope of improved market conditions. The use of a Barclays algorithm and execution in three tranches over the day was also rational.
5. The proposed implied term requiring close-out in accordance with reasonable market practice was rejected. It was unnecessary in a detailed professionally drafted contract, lacked sufficient clarity and certainty, and was unsupported by evidence of a defined market practice.
6. CMC did not breach COBS 2.1.1R. Alternatively, it complied with any applicable duty. Following a margin default, liquidation is not the execution of the client’s orders. The firm may take its own interests into account, while in practice seeking the best achievable result for both parties. The court followed the reasoning in Sucden Financial Ltd v Fluxo-Cane Overseas Ltd and related decisions.
7. The claim succeeded. The defendant was indebted to CMC in £1.31 million together with interest.