The High Court found in favour of an online spread betting company in a claim for £1.3 million in unpaid debts against a real estate tycoon following the close-out of a trading position on an online spread betting platform in March 2020: CMC Spreadbet plc v Tchenguiz  EWHC 1640 (Comm).
The decision will be of interest to financial services providers in relation the nature of obligations under the Financial Conduct Authority's Conduct of Business Sourcebook (COBS) Rules, including in relation to the duty to act in the best interests of a client when closing out a trading account which has a negative balance. The case is also a helpful example of how the court will grapple with whether a contractual discretion to close out has been exercised in a manner that is reasonable and not irrational, arbitrary or capricious, in accordance with the Supreme Court's decision in Braganza v BP Shipping Ltd  UKSC 17.
Spread betting is a form of contract for differences, in which investors speculate about the price movement of financial markets (for example) without owning any underlying asset. In the present case, the defendant had elected to be treated as a professional client when opening his spread betting account with the claimant spread betting firm. The court found that the claimant had rightly treated the defendant as a professional client and that he had waived the rights given to retail investors. As such, the claimant firm had not failed to comply with its COBS obligations to warn the defendant about the loss of protection as a retail investor.
The court also held that the claimant's decision to close out the account, which had accrued a significant negative balance, had not breached the implied Braganza duty to act rationally and in good faith, nor had it breached the COBS rule to act in the client's best interests.
We consider the decision in more detail below.
Mr Tchenguiz opened a spread betting account in 2019 with the claimant, CMC Spreadbet plc (CMC). While the account opened by CMC for Mr Tchenguiz was initially on retail terms, Mr Tchenguiz completed a request form to elect to be treated as a "professional client". At the time, Mr Tchenguiz also held positions with a number of spread betting firms as an elective professional client. The request form notified Mr Tchenguiz of the protections he would lose by his reclassification.
His classification as a professional client allowed Mr Tchenguiz to being able to trade on a high leveraged basis and operate his account with a negative balance. This was subject to CMC's entitlement in accordance with its terms of business to close out any positions where the balances fell below an applicable "close-out level" and to recover any deficit on the account. Retail clients on the other hand enjoy "negative balance protection" (NBP), which limits their losses to the level of their investment.
Mr Tchenguiz subsequently traded on his CMC account, opening substantial trading positions in December and January 2020 in relation to the shares of First Group plc (First Group), a transport operator which runs the Great Western Railway, South Western Railway and the TransPennine Express. However, in March 2020 the value of First Group's shares plummeted as a result of the outbreak of the coronavirus pandemic, resulting in a significant deficit on Mr Tchenguiz's account.
CMC closed out the positions on Mr Tchenguiz's account and sought recovery of the deficit. When Mr Tchenguiz failed to repay these amounts, CMC brought a claim against him in the English High Court for recovery of the debt.
Mr Tchenguiz relied on two principal defences:
- Firstly, Mr Tchenguiz contended that he should not have been treated as an elective professional client as CMC had breached the COBS Rules by failing adequately to warn Mr Tchenguiz about the loss of protection he would have enjoyed as a retail investor, including NBP. Mr Tchenguiz asserted that, had he not been treated as a professional client, he would not have been allowed to operate his account at a deficit, and as such he would not have been liable for the losses beyond his initial investment as claimed by CMC.
- Secondly, Mr Tchenguiz contended that in closing out his account, either:
- CMC breached its duty under COBS 2.1.1R, to act honestly, fairly and professionally in accordance with the best interests of its client; or
- CMC had the discretion to delay close-out for a reasonable time in order to request payment into the account, and by failing to exercise this discretion, it acted in an irrational manner contrary to an implied Braganza duty.
The High Court (Mr David Elvin QC sitting as a Deputy High Court Judge) rejected Mr Tchenguiz's arguments and held in CMC's favour on all issues.
(1) Treatment of Mr Tchenguiz as a professional client
The court considered the rules relating to the classification of Mr Tchenguiz as a professional client and CMC's obligations to warn Mr Tchenguiz about the loss of his rights as a retail investor.
The court found that Mr Tchenguiz was well aware and understood the effect of being classified as a professional client prior to opening his account with CMC. The court noted that CMC had provided warnings about loss of NBP, including in CMC's terms of business and the terms of the agreement which Mr Tchenguiz had signed in electing to be a professional client. In cross examination it became apparent that at the time when Mr Tchenguiz received the warnings about the loss of his rights, he did not consider them significant, and he had fully understood the risks of being categorised as a professional client.
In addition, Mr Tchenguiz had opened his spread betting account with CMC because another firm, with whom Mr Tchenguiz held share equivalents of 18 million, considered its exposure to risk was too great. Mr Tchenguiz therefore reduced his position with that firm, which led to his request to open an account with CMC. Had Mr Tchenguiz not been allowed to open an account as a professional with CMC, it was likely he would have done so with another spread betting firm.
The court went on to note that Mr Tchenguiz had accepted candidly that he knew he would gain certain advantages by being classified as a professional client (such as being able to trade on a high leveraged basis), and that he would lose NBP as a result. This was the case with other spread betting firms with whom Mr Tchenguiz had accounts; these firms had also given Mr Tchenguiz similar warnings. CMC had therefore complied with its obligations to give clear written warnings concerning the loss of NBP, including with regard to the circumstances, knowledge and experience of Mr Tchenguiz.
Accordingly, the court found that Mr Tchenguiz was categorised lawfully as a professional client and CMC did not fail to comply with the duty in COBS to give appropriate warnings with regard to the loss of protections and rights which are enjoyed by retail clients, but not professional clients. The court noted that Mr Tchenguiz was aware of the terms applicable to professional clients, in particular because he had the same classification with other spread betting platforms.
(2) Duties in relation to close out of Mr Tchenguiz's positions with CMC including Braganza Duty and COBS 2.1.1R
The court rejected Mr Tchenguiz's contentions that in closing out his account CMC had breached its Braganza duty or failed to comply with COBS 2.1.1R, being the duty to act in the best interests of its client.
CMC's business terms contained provisions to ensure that the account remained above the relevant close-out level, though the management team had discretion to delay close-out to request payment into the account within a reasonable time in certain cases. Mr Tchenguiz submitted that CMC breached its Braganza duty in reaching its close-out decision, notwithstanding the significant deficit on Mr Tchenguiz's account, in circumstances where it should have delayed its close-out decision and agreed to proposals put forward by Mr Tchenguiz to resolve his outstanding balances.
It was not in dispute that the CMC had an implied Braganza duty to act in a manner that was reasonable and not irrational, arbitrary or capricious. However, the court held that CMC's decision to close out the account was not irrational, in particular because:
- CMC had agreed to Mr Tchenguiz's request for a short period of time to try to find a funding solution. CMC was not required to further delay closing out Mr Tchenguiz's account as it had already given him an opportunity to suggest a funding solution, especially in the significantly deteriorating market conditions.
- CMC's actions in exercising its discretion or not had to be judged in the context of Mr Tchenguiz's contractual obligations to clear negative balances promptly. Mr Tchenguiz had only suggested vague forms of security which were not sufficient to meet his contractual obligations to keep the account above close-out level.
- Taking into account the difficult circumstances in late March 2020 and the fact that all the other spread betting firms with which Mr Tchenguiz had taken out positions were looking to close out and were not cooperating to provide a global solution.
- The fact that the spread betting market is a volatile one in which the spread better inevitably takes risks, as the various warnings given to Mr Tchenguiz by CMC emphasised.
- The court rejected the submission that CMC took irrelevant factors into account, such as CMC's own hedge position and the impact of the falling market conditions on that position. It accepted CMC's evidence that the focus was on compliance with the contractual obligations and on taking reasonable steps to protect both Mr Tchenguiz and CMC.
Under COBS 2.1.1R, there is a general duty to act in the client's best interests. The court found that CMC had not breached this duty, relying on a number of factors, including taking into account Mr Tchenguiz's considerable experience in spread betting, and that CMC had not acted significantly differently from other spread betting firms with whom Mr Tchenguiz had opened accounts.
As CMC succeeded on its claims, and the court rejected Mr Tchenguiz's defences, the court found that Mr Tchenguiz owed CMC a sum of £1.31 million plus interest. Mr Tchenguiz has indicated an intention to appeal the decision.
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