IG Index Limited v Robert Tchenguiz

A firm may re-categorise a retail client as an elective professional client only after taking all reasonable steps to ensure compliance with the qualitative and applicable quantitative tests. The qualitative test involves a reasonable assurance assessment, informed by the nature and complexity of the proposed transactions. The quantitative test is objective, and evidence obtained by the firm must be reviewed before the categorisation decision. A breach of applicable FCA rules ordinarily gives rise to a damages claim under the Financial Services and Markets Act 2000; it does not make the transaction void or unenforceable unless the statutory conditions for that consequence are met. Negative balance protection therefore cannot generally be used as a defence to the contractual debt without an appropriately pleaded counterclaim.

IG Index claimed £6,549,430.34 and interest from a former spread-betting customer following the close-out of positions on FirstGroup plc shares. The defendant contended that he had been improperly re-categorised as an elective professional client and should therefore have remained a retail client with negative balance protection under COBS 22.5.17R.

The remaining issues were whether IG complied with the qualitative test, the relevant quantitative test and the procedural warning requirements for re-categorisation, and whether any breach would provide a defence to the contractual debt. An earlier summary judgment application had been refused in IG Index Ltd v Tchenguiz [2024] EWHC 216 (Comm).

1. Claim succeeded. IG complied with COBS 3.5.3R and 3.5.6R. The defendant was validly treated as an elective professional client and was liable under the Customer Agreement.
2. The qualitative test requires an adequate assessment giving reasonable assurance that the client can make investment decisions and understand the risks, assessed in light of the nature of the transactions envisaged. It does not require experience in transactions of exactly the same type. Transactions with comparable features and complexity may suffice.
3. The quantitative test is objective. Under the relevant limb, the firm had to obtain and review, before categorisation, evidence showing at least one year’s professional work in the financial sector requiring knowledge of transactions with comparable features and complexity.
4. IG’s use of its MiFID scoring system was not shown to be inappropriate. The score reflected relevant experience in exchange-traded derivatives and professional experience, and provided reasonable assurance for the qualitative test.
5. The SFO judgment, together with the defendant’s application, showed that his professional involvement through R20 concerned investment decisions involving CFDs and other derivatives. IG was entitled to rely on that material and had taken all reasonable steps in relation to the quantitative test.
6. The warnings about loss of negative balance protection were sufficient for, and presented in a way likely to be understood by, the average member of the relevant applicant group. COBS 3.5.3(3) was therefore satisfied.
7. Even if a breach of the categorisation rules had been established, sections 138D(2) and 138E(2) of the Financial Services and Markets Act 2000 would ordinarily leave the transaction enforceable. The appropriate remedy would be a damages claim, potentially giving rise to set-off, rather than an automatic negative balance protection defence. The claim was accordingly upheld, with liability under clauses 8 and 16(4) of the Customer Agreement.

The judgment records an earlier summary judgment and strike-out application before HHJ Jarman KC, dismissed in the context of the defendant having a realistic prospect of advancing the novel statutory argument: [2024] EWHC 216 (Comm). This court determined the claim after trial.