IG Index Limited v Robert Tchenguiz

Introduction 1 – 13

Background 14 – 33

The Customer Agreement 34 - 36

COBS 37 – 53

The Re-categorisation Issue 54 – 56

Analysis/Determination of the Re-categorisation Issue

The NBP Defence

Disposal 327 - 328

INTRODUCTION

The Claimant (‘IG’) is a specialist margin trading broker whose services include the provision of spread betting accounts for its customers. The spread bets IG offer relate to financial instruments. In these proceedings IG seek to recover from their former client (‘Mr Tchenguiz’) the balance of £6,549,430.34 which IG claim was due from him on the closing out of his spread betting account on 19 March 2020. Mr Tchenguiz had used that account to take out spread betting positions on the share price of FirstGroup Plc.

By the date of the Claim Form (24 June 2022) IG were also seeking to recover from Mr Tchenguiz contractual interest on the principal sum quantified at £592,398. By the time of the trial before me in June 2024 the claim for interest had risen to just over £1.5m.

Mr Tchenguiz denies he is liable for these sums. He says he only became exposed to paying them because IG had re-categorised him as an Elective Professional Client (‘EPC’). Had he remained a retail client (which is what he was for about 3½ hours between the opening of his account with IG on 11 December 2019 and being re-categorised as an EPC later that day) he would not have become so exposed. That is because retail clients of such business benefit from negative balance protection (‘NBP’) which means that they cannot be liable for anything more than the funds in their account.

NBP is a protection afforded to retail clients under the rules of the Financial Conduct Authority (‘FCA’). The rules which are material to the present claim are contained within the FCA’s Conduct of Business Sourcebook (‘COBS’). COBS 22.5.17R provides NBP for retail clients.

As an EPC, Mr Tchenguiz was not entitled to that protection. However, the defence that he benefits from NBP is based upon the contention that he is to be treated by the court as having remained as a retail client. This, he says, is because his re-categorisation as an EPC by IG was not done in accordance with other provisions of COBS, specifically COBS 3.5.3R and 3.5.6R (“the Re-categorisation Issue”). It is the alleged breach of COBS by IG in re-categorising him as an EPC which he relies upon in saying he remained a retail client with the corresponding protection of NBP (“the NBP Defence”).

By his Amended Defence dated 22 January 2024, Mr Tchenguiz had also alleged that IG owed him certain duties in connection with the closing out of his positions in March 2020; and he had also required IG to prove certain matters in relation to the hedging positions (in relation to his bets) which IG said it held and the unwinding of those positions. IG’s Re-Amended Reply said that Mr Tchenguiz had not pleaded any breach of duty on the part of IG in this regard nor made any counterclaim for loss allegedly suffered by him. There would have been issues for me to decide about the existence of the pleaded duties in relation to close-out and what consequences, if any, flowed from them but those issues disappeared upon a further amendment of the Defence. By his Re-Amended Defence dated 30 May 2024, Mr Tchenguiz abandoned that part of his defence relating to the close-out issue. The Re-categorisation Issue and the NBP Defence were, therefore, the remaining issues for trial and for determination by this judgment.

IG’s position is that the Re-categorisation Issue does not provide Mr Tchenguiz with the basis of a defence to the claim. IG deny they acted in breach of COBS in re-categorising him as an EPC. However, even if a breach in that regard was established, it would not follow that his debt as an EPC was extinguished. Instead, the position under the Financial Services and Markets Act 2000 (‘FSMA’) is that any such breach would potentially provide him with a cause of action for damages but “no such contravention makes any transaction void or unenforceable” (to quote from section 138E(2) of FSMA). Mr Tchenguiz has not sought to bring a counterclaim for such damages in extinction or reduction of IG’s debt so, IG contend, there is no defence (not even one of set-off) to what the firm claims from him.

In response to Mr Tchenguiz’s application (dated 26 September 2023) to amend his Defence to plead the allegations in relation to close-out (which, as explained, he duly did but then later abandoned by the Re-Amended Defence) IG had applied, by an application dated 5 October 2023, for the defence to be struck out and/or for summary judgment against Mr Tchenguiz. IG’s application was founded largely upon the contention that (even assuming IG failed on the Re-categorisation issue) the absence of a counterclaim meant that, in the light of section 138E(2) of FSMA, there could be no defence to the claim. Even Mr Tchenguiz’s then proposed re-amendment did not include a counterclaim.

By an order dated 17 November 2023 HHJ Keyser KC directed that the applications be heard together. HHJ Jarman KC heard the applications on 18 January 2024. In support of IG’s application, Mr Mayall, for IG, relied upon section 138E(2) and the authorities I address below in Section G of this judgment. Ms Barton KC and Mr Lewis, on behalf of Mr Tchenguiz made the argument that the particular statutory provision and earlier authorities addressing it (or its predecessor in what was then section 151(2) of FSMA) now had to be read subject to the protections (including NBP) introduced in 2018 for retail spread betting clients by the first of a number of Decisions of the European Securities and Markets Authority (‘ESMA’) and reflected in COBS 22.5.17R with effect from 1 August 2019.

By his judgment dated 18 January 2024 ([2024] EWHC 216 (Comm), at [33], HHJ Jarman KC concluded:

Although that was sufficient to dispose of IG’s application, the judge went on to say that he did not accept IG’s reasons for the delay in making the application (so close to a trial which was then due to take place before me in February but which was soon after vacated by agreement between the parties) to be good ones.

The judge also had before him Mr Tchenguiz’s application to re-amend the Defence in relation to close-out issues. He granted that application though, as already noted, he did so in vain. In their written opening submissions for trial, Ms Barton KC and Mr Lewis said the matters pleaded in relation to close-out had been advanced to obtain disclosure showing the process adopted by IG and, having reviewed that disclosure, the decision had been made not to make a counterclaim.

At this introductory stage of the judgment following the trial, I express my gratitude to counsel and their respective instructing solicitors for their clear and comprehensive written and oral submissions, made by reference to authorities confined to a number which obviously reflected their deep thought about the arguments to be made on the Re-categorisation Issue and the NBP Defence, and also a very well-ordered trial bundle. As I explain in Section G below, there was a little bump in the road to judgment on the last day of trial (arising out of the potential impact of section 137D of FSMA on the NBP Defence and disagreement between counsel as to whether that was “in play” on the NBP Defence) but, for the reasons given in that section, I believe I have been able to overcome that while still doing justice to the parties without further recourse to them.

Mr Tchenguiz did not give evidence at the trial and IG did not seek to rely upon his witness statement served in the proceedings as hearsay evidence in relation to any contentious aspects of the Re-categorisation Issue (cf. CPR 32.5(5)).

However, Mr Tchenguiz’s witness statement contained a useful summary of how, prior to opening his account with IG, he had taken out extensive spread betting positions with other spread betting providers on the share price of FirstGroup plc. This position was taken as part of a strategy Mr Tchenguiz was pursuing in conjunction with a US Hedge Fund named Coast Capital. The strategy was to build up a substantial stake in FirstGroup plc to then encourage the management of FirstGroup plc to rationalise its operations and, in particular, to sell various parts of its operations and thereby increase the value to shareholders.

In a compulsory ‘Notification of Major Holdings’ dated 28 November 2019 Mr Tchenguiz notified the Stock Exchange that he held 5.08% of the voting rights in FirstGroup plc of which 5.06% were held through spread betting positions.

In addressing the facts relevant to the Re-categorisation Issue below, I explain in detail how, on 11 December 2019, Mr Tchenguiz opened his account with IG as a retail client and then shortly thereafter applied for and (after an initial refusal) obtained EPC status. On 17 December 2019 he changed his account to a ‘Select Account’.

His witness statement explained that between 11 December 2019 and 16 March 2020 he had invested some £39m of his own money in taking open spread betting positions with a number of other spread betting firms equivalent to about 62 million shares in FirstGroup: 8.75m shares with RJ O’Brien, 45m shares with InterTrader, 3m shares with CMC, 4.25m with Spreadex and 2m shares with ETX. By the time IG closed out his account in March 2020, his spread bets with IG related to nearly 16.5m million shares in FirstGroup.

Mr Tchenguiz’s spread betting upon the share price of FirstGroup is already a matter of public record. In CMC Spreadbet Plc v Robert Tchenguiz [2022] EWHC 1640 (Comm) (‘the CMC Spreadbet case’) Mr David Elvin QC, sitting as a Deputy High Court Judge, said at [3]:

Mr Tchenguiz had opened his account with CMC on 17 December 2019, six days after he opened his account with IG. In the litigation with CMC he also challenged CMC’s categorisation of him as an EPC and also alleged that CMC had breached obligations in relation to the closing out of his account. He failed in both lines of defence; though the judge’s finding that CMC did not act in breach of COBS obviously does not assist me in determining the Re-categorisation Issue between Mr Tchenguiz and IG. Even allowing for the inference that IG would have been one of “the other companies” mentioned by the judge at [59], I make the same observation about what is said in that same paragraph about Mr Tchenguiz’s candid acceptance in cross-examination that he was warned, was therefore aware and understood the consequences of losing NBP as a result of being classified as a professional client; and that being so classified enabled him to trade on a highly leveraged basis with each of those spread betting firms.

Mr Tchenguiz’s bets on the shares price in FirstGroup were “buy” bets, with him betting that FirstGroup’s share price would rise. In fact, having reached £1.34 in February 2020, the share price then started to drop as a result of the Covid-19 pandemic. The share price had fallen to 86 pence by 13 March 2020 and progressively decreased thereafter.

The progressive fall in FirstGroup’s share price meant that between 5 March and 16 March 2020 he faced margin calls on his account. On 16 March 2020, Mr Tchenguiz breached the liquidation level on his account. The liquidation level on his account was set at £0.00. This meant that if the net equity on his account (any cash balance plus or minus any unrealised profits or losses) fell to zero then IG had the right to liquidate his open positions. The effect of his EPC status was that Mr Tchenguiz benefited (potentially) from a liquidation level set at zero and also a £250,000 waiver of margin cover. Had he remained a retail customer (by which I mean, had IG been treating him as such in early 2020) then these terms would not have applied and his account would have been closed out sooner. That said, the bets he in fact made as an EPC would not have been made by him on the same terms had he remained a retail customer.

IG had hedged its own position on Mr Tchenguiz’s bets by buying equity swaps through its brokers in an equivalent number of shares in FirstGroup as the bets themselves (and with the brokers hedging their own exposure under that derivative transaction by acquiring the underlying stock). The closing out of Mr Tchenguiz’s account led IG to unwind its own hedging positions with the brokers’ onward hedge being unwound by trades in the shares themselves.

As mentioned, by his recent Amended Defence, Mr Tchenguiz had made a complaint about IG unwinding its hedging position by selling its equity swaps in relation to the majority of shares (12.5m of them) to Coast Capital at 29.2p per share on 19 March 2020. IG’s evidence showed the remainder had in the 3 days before been sold in stages – using a Volume in Line Algorithm (‘VIL’) designed to avoid the market price being depressed by sales in a number not proportionately in line with volume of trades in the underlying market - at either 41.91p, 30.69p, or 27.45p. Those prices, with a slight discount, were then booked to Mr Tchenguiz’s spread betting account to produce the balance due on the closing out of the account of £6,549,430.34.

However, the defence relating to close-out issues having been abandoned, Mr Tchenguiz does not challenge the close out balance, or some part of it. Instead, his defence is that, there being no funds in his account at close-out, he is not liable for any of that balance on the basis that he remained a retail client with the benefit of NBP.

The spread bets which produced the balance of £6.549m were in fact placed by Mr Tchenguiz as an EPC.

The risks involved in spread betting have been highlighted in a number of previous cases, including the CMC Spreadbet case mentioned above.

Rather than cross-refer to the corresponding paragraph in the CMC Spreadbet case, in the interests of self-containment I now set out the same passages from the decision of Rix LJ in Spreadex Limited v Dr Vijay Ram Battu [2005] EWCA Civ 855 (as quoted by Mr Elvin QC in that case) which highlight the key features of spread betting:

The upsides and downsides for the spread better, highlighted by those paragraphs and outcome of Mr Tchenguiz’s spread bets, apply to both retail and professional clients of spread betting firms.

However, in Section D below, I refer to the measures of protection for retail clients engaging in contracts for difference (‘CFDs’, of which a spread bet is a certain type) which have been introduced more recently by EU law and which were implemented in COBS by the time Mr Tchenguiz opened his account with IG in December 2019. As I explain below, the protection introduced by COBS in August 2019 for retail investors included NBP, margin close-out protection and initial margin protection.

Although Mr Tchenguiz’s counsel emphasised the importance of all three measures, and their background in the Europe-wide concern amongst regulators about how CFDs were being marketed to retail clients, only the NBP Defence (under those protective measures) is advanced in response to the claim. As explained above, whereas the “application” of the other protective measures might involve a more nuanced approach to the financial effect of bets in fact undertaken on an EPC basis, the NBP defence (if a good one) provides an answer to the entirety of IG’s claim.

Ms Barton KC and Mr Lewis represented Mr Tchenguiz, in the CMC Spreadbet case as they did before me. In that case, as appears from paragraph 6 of the judgment, they also advanced the NBP Defence as a result of alleged breaches of COBS by CMC in re-categorising him as an EPC. The judge did not need to address the NBP Defence because he found there was no such breach: see paragraphs 90 and 91 of the judgment.

Ms Barton KC told me that Mr Tchenguiz appealed the decision in the CMC Spreadbet case but the appeal was compromised on terms before the appeal was heard.

In Section E below I explain how, on 11 December 2019, Mr Tchenguiz signed up to the terms of IG’s Spread Betting Customer Agreement (“the Customer Agreement”). There is no dispute about that, or about the terms of the Customer Agreement.

IG’s claim is a straightforward contractual claim arising out of the proper implementation of the terms of the Customer Agreement. The Particulars of Claim set out in full the terms relied upon in seeking the principal sum and interest. The material provisions of the Customer Agreement are:

However, on his argument on the Re-categorisation Issue, Mr Tchenguiz says the claim based upon these contractual terms (specifically clause 8(12)) is met by the NBP Defence. As noted above, he advances this defence by relying upon COBS 22.5.17R. Although I did not understand his counsel to rely upon the particular phrase in clause 8(12) (the Amended Defence instead took a broader approach of denying the relevance of the terms to this claim) it amounts to him saying that the debt on close-out is subject to the “Applicable Regulation” in COBS 22.5.17R. The definition of ‘Regulations’ in clause 32 of the Customer Agreement includes ‘the FCA Rules’.

It is necessary to set out the provisions of COBS which are relevant to the Re-categorisation Issue and appropriate to consider them before turning to the factual account of how Mr Tchenguiz became a client of IG and then quickly had his EPC status approved.

The provisions of COBS relevant to this case are those in force when Mr Tchenguiz opened his account with IG in December 2019.

COBS 3.4 is headed ‘Retail clients’ and provides, simply, that a retail client is a client who is not a professional client or an eligible counterparty.

There being no question that Mr Tchenguiz was an ‘eligible counterparty’ (as defined in COBS 3.6) it is this provision which is at the heart of Mr Tchenguiz’s case that if he was not (or should not have become) a professional client (because his re-categorisation as an EPC involved a breach of the rules) then he remained a retail client.

The provisions of COBS 3.5 are more comprehensive than COBS 3.4. Those which concern Mr Tchenguiz’s re-categorisation as an EPC are found in COBS 3.5.3R, 3.5.6R and 10A.2.6. The “R” denotes that the provision is a ‘rule’ made by the FCA for the purposes of sections 138D and 138E of FSMA (addressed in Section F below: the NBP Defence).

COBS 3.5.3R (in force from 3 January 2018) provides as follows (with me highlighting in bold the two definitional terms which identify the two tests mentioned in COBS 3.5.6R):

COBS 3.5.6R (also in force from 3 January 2018) provides as follows:

COBS 10A - the relevant provisions of which incorporate either those found in ‘MiFID II’ (Directive 2014/65/EU) or the ‘MiFIR’ (the MiFID II Delegated Regulation (EU) 2017/565) - is also material to the Re-categorisation Issue.

COBS 10A.2.1R provides:

COBS 10A.2.6 provides:

The focus in this case has been upon the Qualitative Test (COBS 3.5.3(1)) and the third limb of the Quantitative Test (COBS 3.5.3(2)(c)). Mr Tchenguiz says that IG did not take all reasonable steps to ensure that he satisfied those before accepting his request to be treated as an EPC. I address the competing arguments more fully in Section E below. At this stage I note that he says that IG approached the qualitative test in a rudimentary and inadequate way (in simply applying the ‘MiFID score’ given to him at account opening). In relation to the third limb of the Quantitative Test, he says that IG took account of his position as a beneficiary of a family trust, as opposed to his own expertise, experience and knowledge, and failed to verify with him the understanding which IG says it gleaned from what was said about him (and that family trust) in a reported court judgment.

The provisions of COBS 22.5 were introduced with effect from 1 August 2019 by the Conduct of Business (Contracts for Difference) Instrument 2019 (“the 2019 Instrument”) made by the FCA. Paragraph A of the 2019 Instrument stated that it was made by the FCA in the exercise of five different rule-making powers under FSMA. I return to the point about the rule-making source of COBS 22.5 in Section G below.

The 2019 Instrument defined ‘restricted speculative investments’ within the meaning of the provisions identified below as including leveraged CFDs and leveraged spread bets (but only where such investments are ‘financial instruments’, thus excluding sports spread bets).

The key provision in COBS 22.5 (for the purposes of the NBP Defence) is COBS 22.5.17R:

Mr Tchenguiz’s counsel also relied upon COBS 22.5.6R (also introduced by the 2019 Instrument but with effect from 1 September 2019) which relates to standardised risk warnings to retail clients in relation to restricted speculative investments:

COBS 22.5.6R(1) provides:

Counsel also referred to the requirements of COBS 4.5A.1R and 4.5A.3 (applying article 44 of the ‘MiFID Org Regulation’: Commission Delegated Regulation (EU) 2017/565 of 25 April 2016) concerning the provision of information and nature of communications which relate to a firm’s MiFID business. The latter provision includes the following conditions for any information provided to a client:

Mr Mayall for IG said there were three distinct stages to the contractual arrangements between IG and Mr Tchenguiz: (1) the opening of his account on 11 December 2019; (2) his re-categorisation as an EPC later that same day; and (3) his change to Select Account terms on 17 December 2019.

Whereas the implications of that third stage are potentially relevant to the competing arguments over the NBP Defence, only the events of 11 December 2019 are material to the Re-categorisation Issue; and in particular those between the opening of his account at 11:34 and an email from IG timed at 15:01 informing him that he was now classed as a professional client.

It is appropriate first to consider what the contemporaneous documents record in relation to Mr Tchenguiz’s re-categorisation as an EPC before turning to what the witnesses at trial said about that process and, after that, to provide a summary of the parties’ rival arguments.

Mr Tchenguiz was introduced to Peter Ward, then Head of the Premium Client Sales Division at IG, by an email dated 10 December 2019 from Daniel Pittack, an existing client of IG. Mr Ward sent an email to Mr Tchenguiz later that day suggesting that they have a telephone call the following morning. At the start of the trial an issue arose about the late disclosure by IG of recordings and transcripts of telephone calls relating to Mr Pittack’s introduction of Mr Tchenguiz. It had been flagged by Ms Barton KC and Mr Lewis in their written opening. The disclosure did not bear upon the issues to be determined by me. Mr Ward was asked some questions about Mr Pittack’s introduction in cross-examination and re-examination. I directed that the claimant’s solicitors should prepare a witness statement addressing this late disclosure, and one was made by Ms Rutnah of Dentons by the end of the trial.

Between the times of those two emails Mr Ward had spoken to his colleague Robert Pike, then IG’s Head of Premium Client Management, about Mr Tchenguiz. Mr Pike told Mr Ward that he had previously had dealings with Mr Tchenguiz when he (Mr Pike) worked at Spreadex. At 15:59 of 10 December 2019, Mr Pike sent an email to Ellen Rogers, then IG’s Head of Compliance Assurance (copying in Mr Ward) saying:

In response, Ms Rogers sent an email at 9:33PM to Amol Thapa of IG based in Bangalore which said:

Mr Thapa replied on the 11 December at 06:01 as follows:

The ‘Riskography’ section in the attached search results involved Mr Thapa highlighting that the Serious Fraud Office had dropped those charges.

Ms Rogers then sent an email at 10:19 on 11 December to Mr Pike, Mr Ward and another colleague (copying Mr Thapa) which said:

By an email timed at 11:13 on 11 December Mr Ward invited Mr Tchenguiz to complete the online application to open an account. Mr Tchenguiz immediately responded by email to say thank you and that he would do so that day. Within the following few minutes Mr Tchenguiz then sent an email to David Hills, Legal Counsel of R20 Advisory Limited (‘R20 Advisory’), asking him to open the account and Mr Hills replied to say “Will do it now”. R20 Advisory is a company of which Mr Tchenguiz had been a director since its incorporation in 2010.

Before the account was opened Mr Ward sent Mr Tchenguiz a further email at 11:18 by way of a follow-up on the one he had sent 5 minutes earlier. He said:

IG’s internal records show that the account opening process (undertaken by Mr Hills on Mr Tchenguiz’s behalf) was started at 11:24 and completed at 11:33 on 11 December 2019.

The material parts of the application form (‘the Account Opening Application’) were completed as follows (I have italicised the answers):

In response to the question on the form “Which type of account would you like to open?” the answer was “Both spread betting and CFD trading”.

The material parts of IG’s record of the ‘MIFID Section’ of Mr Tchenguiz’s successful application to open his account recorded the following information:

The basis of Mr Tchenguiz’s MiFID points score of 100 was explained in the evidence of Sarah Gore Langton addressed below.

The Risk Disclosure Notice and the Customer Agreement (Mr Tchenguiz’s acknowledgement of their terms being confirmed by the ticks on the Account Opening Application) were addressed by a ‘declaration’ in the following terms:

Mr Tchenguiz was informed by email at 11:34 on 11 December 2019 that his account had been opened. As well as referring to other matters (including a ‘Risk statement’ about the high degree of risk carried by IG’s services and his need to understand his exposure) it informed Mr Tchenguiz as follows:

Mr Tchenguiz made the first payment into his account of £300,000 at about 12:04 that day. He then sent Mr Ward an email asking when he could begin trading.

Following his email sent at 11:18, and responding to say “I will call you when the money lands”, Mr Ward sent Mr Tchenguiz another email at 12:10 on 11 December, saying:

Mr Tchenguiz immediately (within the minute) replied “Yes please” and within a further three minutes Mr Ward had sent him the details of how to apply for ‘Professional account’ status.

IG’s online application form (‘the EPC Application’) informed the applicant for a professional account of the benefits, as a professional client, of not being subject to retail margin rates and the availability of a greater range of products. The form referred to the restrictions announced by the European regulators on the sale of certain product to retail clients and to minimum staring margin rates on CFDs and spread bets of between 3.33% and 20% (depending on asset class). It also included the following:

Mr Tchenguiz (probably through Mr Hills) then completed the EPC Application. The penultimate page of the online form included this wording:

The final page of the form concluded with a section headed: “Confirm you understand the consequences of the changes to your FCA protection.” The first consequence which the applicant was required to acknowledge, and to confirm his understanding of, was:

The final step in the application process was for the applicant to tick the box stating: “I have read the written warning and would like to proceed”.

The loss of NBP in the event of Mr Tchenguiz becoming a professional client was therefore flagged by IG in the application form.

I do not here set out the answers given by Tchenguiz in that first application because, save in the one respect noted in paragraph 92 below, they were identical to those given in the application which led successfully (as a matter of form) to him becoming an EPC. The relevant answers in that second application are set out in paragraphs 89 and 90 below.

Mr Tchenguiz’s (first) EPC Application was completed at 12:48 on 11 December 2019.

An automated email response from the IG Client Services Helpdesk immediately acknowledged receipt of the application, said that he would be informed within 24 hours whether or not he was eligible to be classified as a professional client and said “in some cases you may need to provide additional documentation or supporting evidence, but we will let you known if this is the case.”

In the event, Mr Tchenguiz’s application (which was reviewed by Chris Seeney in IG’s Credit Team) was rejected within 30 minutes without resort to him. By an email sent at 13:18 he was informed his application had been unsuccessful. The message said:

Mr Ward (to whom Mr Tchenguiz had just sent an email saying his funds should be with IG within an hour or so) followed up this message with an email to Mr Tchenguiz at 13:36, which said:

Mr Ward sent an email to his colleague Mr Seeney, referring to Mr Tchenguiz’s recently opened account, asking to be informed when his money had arrived, and saying “he sent in a Pro app which I hear was rejected straight away. Any chance I can know why we didn’t park whilst we asked for more info?”. Mr Seeney replied saying: “The research I did online indicated that he is in property and the employer listed is a management consultancy firm. Couldn't find him on the FCA register or LinkedIn.”

Mr Tchenguiz (again, he says, through Mr Hills) renewed his application for a professional client account by completing EPC Application for a second time at 13:34 on 11 December 2019.

In the electronic trial bundle IG’s questions and Mr Tchenguiz’s answers on the EPC Application appeared in different places and the two therefore required cross-referencing.

However, in their closing submissions Ms Barton KC and Mr Lewis very helpfully compiled the tables below from which the questions (with cross referencing to the relevant page in the trial bundle) and answers can be seen in one place.

IG’s focus was upon the Quantitative Test in COBS 3.5.3R and, as the applicant for a professional account, Mr Tchenguiz was informed that “[T]o qualify, you need to meet at least two of the three FCA criteria below.” He completed the EPC Application as follows:

The next section of the EPC Application was completed as follows.

It will be noted that no drop-down options appeared under the description of employment roles and that in her evidence Ms Ellen Rogers (IG’s Head of Financial Crime Compliance) made some suggestions as to what those options would be. On behalf of Mr Tchenguiz, Ms Barton KC suggested it was more likely to reflect the ‘White List’ of occupations (such as ‘trader’ or ‘manager’ according to the financial sector in question), and possibly also the ‘Grey List’ and/or ‘Black List’, set out in IG’s process document for online upgrades mentioned below.

These answers given by Tchenguiz in this second EPC Application were the same as those given in the previous unsuccessful application, save for those additional, final three words: “… including margined products.”

Mr Tchenguiz also answered a section under the heading ‘Declared Investments’ that the current value of his savings and investments was greater than £1m. This meant, as Mr Ward’s first email (sent at 11:18) in relation to the upgrade to EPC status recognised (“We can pass that one already”), that one of the three criteria under COBS 3.5.3R was met. Although the Amended Defence says IG failed to take all reasonable steps to ensure that COBS 3.5.3(2)(b) was satisfied, it is not in dispute that the criterion was satisfied.

So far as the first of those criteria was concerned (see the terms of COBS 3.5.3(2) set out in paragraph 42 above), as with the first application, no answer was given to the question “How many significantly sized trades have you done on average per quarter in the last year?”. Accordingly, IG did not and do not now rely upon that criterion having been satisfied.

This explains how the Re-Categorisation Issue focuses upon IG’s alleged failure to comply with the Qualitative Test by reference to the third limb of the Quantitative Test: “the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.”

This EPC Application by Mr Tchenguiz was referred to Ms Kelsey O’Connor (then a Senior Credit Controller within IG’s Credit Department).

Ms O’Connor dealt with the Qualitative Test element of the EPC Application herself. This she did by taking Mr Tchenguiz’s MiFID score of 100, at account opening, and applying what was said in IG’s document titled ‘Process document for online upgrades to Professional’ (‘the EPC Process Document’, as revised in September 2019). The EPC Process Document stated that a MiFID score of 100 satisfied the Qualitative Test.

However, Ms O’Connor referred the Quantitative Test element of the application (i.e. the third limb) to Ms Rogers. She sent Ms Rogers an email at 14:10 (copied to Mr Ward and also Azman Hoq) in which she said:

The email provided a link to the judgment of Sir John Thomas P. in R. (Tchenguiz and another) v Director of the Serious Fraud Office and others [2012] EWHC 2254 (‘the SFO Judgment’). Ms O’Connor had also highlighted and quoted paragraphs 5 and 13 of the SFO Judgment.

Ms Rogers responded to Ms O’Connor (copying Mr Ward and Mr Hoq) by an email at 14:54 to say:

Before she sent that email, Mr Hoq had sent one to Mr Ward, at 14:35, saying Mr Tchenguiz had re-applied for a professional account and saying:

Ms O’Connor continued the email chain with Ms Rogers by sending a message at 15:00 saying Mr Tchenguiz’s application had been approved.

An email from IG Client Services Helpdesk to Mr Tchenguiz timed at 15:01 informed him: “We’re pleased to confirm that following your assessment, your application has been approved and you are now classified as a professional client.” The message informed him of a number of changes to his account, including his ability to trade with professional margin rates. Under the heading ‘Important Information’ it also informed him that, as a professional client, he would waive some FCA protections, including:

The message continued:

Therefore, in just under 3½ hours from opening his account with IG, Mr Tchenguiz had acquired EPC status.

By an email from Mr Hoq of IG to Mr Tchenguiz, sent at 15:11, he confirmed that change and explained:

He made his first spread bet on the account at 11:45 on 12 December 2019.

On 17 December 2019 Mr Tchenguiz applied to change the nature of his account to a Select Account. This was the result of telephone conversations that day between Mr Ward and Mr Tchenguiz about setting the liquidation level on the account at zero and an increase in the margin ceiling from 25% to 35% if his bets with IG in FirstGroup shares increased from 5m to 12m (including the move to IG of existing trades with RJ O’Brien). Mr Ward had already raised this possibility with IG’s Credit Risk team, saying in an email dated 12 December (08:05): “My chap opened up yesterday and funded 300K, he is now also Pro. Please can you move to select margin rates, he is worth over £1bn and will be taking some decent sizes on equities”. In a later call on 17 December, Mr Ward said he had discussed matters with that team and “[T]hey came back to me and said we could do the 12 million at 30% but we can't go any lower though but we will review the concession every now and then ….”.

Mr Ward and Mr Tchenguiz also discussed a ‘waived deposit limit’ of £250,000. In an email to him of 16 December 2019 (16:50) Mr Ward had said:

Before upgrading to the Select Account (with the liquidation level set at zero), at 11:52 on 17 December, Mr Tchenguiz had received a margin call as a consequence of the trades made by him that day.

The terms attaching to this type of account were set out in Mr Ward’s email to Mr Tchenguiz of 17 December (at 14.29) headed ‘Select Account Offer’. The terms were as follows:

The footer to the message containing those terms began with a warning that all trading involves risks and also stated “Professional clients can lose more than they deposit”.

Mr Tchenguiz responded by an email at 14:53 saying: “Thank you, I am ok with this.”

By an email sent at 14:54, Mr Ward forwarded to Mr Tchenguiz IG’s agreement on the margin rate:

The Select Account was only available to Mr Tchenguiz as an EPC. It is clear from the terms quoted in Section C above (both generally and in relation to contractual interest) that the terms formed part of the Customer Agreement. Accordingly, the Select Account terms fed into the operation of clauses 8, 15 and 17 of the Customer Agreement as set out in paragraph 35 above. The setting of the liquidation level at zero (by reference to the ‘net equity’ explained in the Select Account terms) meant that Mr Tchenguiz was given greater leeway before his bets were automatically closed out. Without that, even as a professional client, he would have become exposed to being closed out when his funds fell below 50% of the margin (as provided for by clause 15 of the Customer Agreement and subject to any waived margin) needed to maintain open positions.

IG called four witnesses at the trial. Mr Tchenguiz did not give evidence and did not call any witnesses.

Mr Ward is Head of Premium Clients at IG. He was in 2019 head of the Premium Client Sales Division and was Mr Tchenguiz’s point of contact within IG.

Mr Ward gave straightforward and credible evidence. His account of how Mr Tchenguiz’s account was opened, upgraded to EPC status, and then to a Select Account, and how his positions in First Group were closed out was not challenged on behalf of Mr Tchenguiz. Mr Ward confirmed that he did not see a copy of either of Mr Tchenguiz’s EPC Applications.

He explained that the upgrading of Mr Tchenguiz to the status of an EPC and then as a Select Account client was “all part of the same process” in circumstances where he knew the client would want to trade on preferential terms. In my judgment, that observation was justified given that EPC status was secured in about 3½ hours. He said that Mr Pittack, who had introduced him, said Mr Tchenguiz would wish to be set up as a professional as he himself was. Mr Ward said: “I was just hoping to be helpful and efficient, and effectively have him set up as he was with other providers”. He went on to say:

Because of his impression that “things were wanting to move at a certain speed or efficiency” Mr Ward confirmed that he had told Mr Tchenguiz that the Credit Team might wish to ask for evidence of trades done elsewhere and, if so, they would request a statement. In fact, the first EPC Application had been rejected without any such request.

Mr Ward did accept in response to questions from Ms Barton KC that his email of 11 December 2019 at 11.18) recommending an upgrade to professional status had not included warnings of the corresponding risks (specifically the loss of NBP). He said: “I didn't in this email, no. I was reliant on the documentation that you then do when you self – you now, you apply” and “… all of that’s in the documentation …”.

Mr Ward confirmed that the Select Account upgrade was only available to professional clients. The advantages of Mr Tchenguiz becoming an EPC were addressed by him in cross-examination as follows:

Ms O’Connor is IG’s Senior Payments Excellence SME (‘SME’ denoting “subject matter expertise”) and in December 2019 was employed as a Senior Credit Controller. As appears above, she reviewed and (having referred one aspect of it to Ellen Rogers, IG’s Head of Compliance Assurance) finally approved the second EPC Application.

Ms O’Connor explained that she was responsible for applying the Qualitative Test to the second EPC Application and also considering whether Mr Tchenguiz satisfied the financial resources limb (COBS 3.5.3(2)(b)) of the Quantitative Test.

Ms O’Connor was asked about the EPC Process Document and confirmed this was used by her team in determining applications for EPC status. She said that at the time IG determined the Qualitative Test solely by reference to its MiFID scoring system. An applicant for EPC status needed to have a MiFID score of at least 100 and Mr Tchenguiz had scored 100 when he had opened his account earlier that day. IG’s ‘Retail to Professional Procedure’ (‘the Online Procedure’, v. 1.1, revised in March 2018) which was contained within the firm’s ‘COM Guide’ said the same about the 100 points required. “COM” stands for Close Out Monitor (part of the firm’s Internet Monitor that allows it to manually close positions that the automatic system was unable to close) and the Online Procedure was to be used by employees dealing with the categorisation of clients from retail to professional status. Ms O’Connor said she could see that Mr Tchenguiz’s MiFID score appeared on the details of his account and she saw he had the 100 points which the Online Procedure said was required to meet the Qualitative Test.

In cross-examination, Ms O’Connor was asked about this as follows:

In relation to Mr Tchenguiz’s financial resources, she said she did an internet search to check the accuracy of what Mr Tchenguiz had said about his wealth. She had recorded “Declared savings fine and plenty or articles regarding client’s wealth on line.”

Ms O’Connor explained that she had referred the third limb of the Quantitative Test (the professional experience relied upon by Mr Tchenguiz) to Ms Rogers because she had dealt with the opening of the account and his position was not as straightforward as for other job roles, so she wanted a second opinion. Referring to what Mr Tchenguiz had said about his directorship of R20 Advisory, she said that in her own initial searches she “ …. had tried to search for the history of the client, but given there was numerous articles about different trials it was hard to pinpoint anything that would support what had been written.”

She then exchanged the emails with Ms Rogers on 11 December 2019 including the email sent at 14:10, quoted in paragraph 98 above, in which she had cut and pasted Mr Tchenguiz’s declaration of his professional experience in the First EPC Application, the two extracts from the SFO Judgment and a hyperlink to the entire judgment. The terms of Ms Rogers’ reply (at 14:54) are set out in paragraph 100 above. Ms O’Connor relied upon what Ms Rogers said in that email when completing her approval of Mr Tchenguiz as an EPC.

Ms O’Connor made the note on IG’s system that the second EPC Application had been approved and the basis for approval.

In relation to the third limb of the Quantitative Test, she stated her own understanding that COBS did not impose any ‘cut-off’ for considering a client’s investment expertise, in terms of the staleness of any past professional involvement in the relevant financial sector. She considered that a year’s experience 20 years ago might be sufficient to establish it. That answer must be considered alongside the provisions of COBS 10A.2.6 (see paragraph 46 above) which says a firm should not rely upon information which the firm is aware or ought to be aware is manifestly out of date. However, whether or not that could be said of the information provided by Mr Tchenguiz, Ms O’Connor was not responsible for the decision as to whether Mr Tchenguiz passed that limb of the Quantitative Test.

I accept the evidence of Ms O’Connor which was not the subject of serious challenge. It demonstrates that, in assessing Mr Tchenguiz against the Qualitative Test, she applied IG’s policy under the EPC Process Document.

Ms Gore Langton is IG’s Chief Risks Officer, having previously been the firm’s Chief Compliance Officer at the time Mr Tchenguiz became a client of IG. She was not involved in Mr Tchenguiz’s application to become a client and then to upgrade to EPC status but she spoke to IG’s policies and procedures in relation to that process. She explained that she holds the firm’s FCA-designated senior management functions of SMF 16 (the compliance oversight function) and SMF 17 (the money laundering reporting function). What Ms Gore Langton said was not challenged on behalf of Mr Tchenguiz who instead argued that her evidence revealed IG’s procedure under COBS 3.5.3R to be inadequate.

Ms Gore Langton was asked about the MiFID scoring system, initially applied at the account opening stage, for determining whether an applicant passed the Qualitative Test by reference to IG’s policy at the time (as applied by Ms O’Connor) for upgrading to a professional account.

Ms Gore-Langton explained that the primary purpose of IG’s MiFID scoring system was to assess whether the products and services available in the retail CFD or spread betting account are appropriate for the client in accordance with COBS 10A. It was to establish whether the retail client had the necessary knowledge or experience to understand the risks involved in relation to the product or service offered. She explained that, for the purposes of this appropriateness test at account opening, applicants were asked about their trading over the last 3 years because “at the time we believed that the three year point was industry practice for an appropriateness assessment.”

She confirmed that the scoring system was internally designed and went on to say:

She also explained, by reference to IG’s policy, that whereas the retail client account of the kind Mr Tchenguiz initially opened required a MiFID score of at least 40 (and a wealth score of 2), the EPC account opened by him required a MiFID score of at least 100 (and a wealth score of 3). This score was determined in accordance with an assessment of the relevant experience over the past 3 years. Ms Gore Langton said:

Although she was not involved in Mr Tchenguiz’s applications in December 2019, Ms Gore Langton explained by reference to the scoring system how he had obtained a MiFID score of 100 when he opened his account. He obtained 40 points for his stated trading experience in derivatives which was doubled to 80 points for trading independently or with advice (because this indicated he was the decision-maker on the trades whether or not he had received advice beforehand) and 20 points for his professional experience through being a director in the finance industry. She explained that 20 points for such broader experience (based not upon past trading but having a role in a financial institution or a professional qualification, or possibly both) was a cap which reflected IG’s policy intention that a client seeking EPC status should not get to the required 100 points without experience of trading in derivatives.

The 40 points (before doubling) for trading experience reflected the fact that Mr Tchenguiz had said he had traded frequently (more than 20 times) in exchange traded derivatives. Ms Gore Langton said such products have a level of complexity compared to, say, a “vanilla share dealing account”. She said (of the client applicant):

Mr Gore Langton explained how the same standardised table used by IG for scoring on the appropriateness test (COBS 10A) was used in testing eligibility for an upgrade to a professional account. She said that an understanding of the client’s trading experience was a key element in the qualitative assessment undertaken by IG, whether the information was gathered at account opening or through the client’s subsequent trading with IG. One relevant passage in her cross-examination was as follows:

Ms Barton KC suggested to Ms Gore Langton that the appropriateness test under COBS 10A was less exacting than the test for re-categorisation as an EPC under COBS 3.5.3R. She responded:

Ms Gore Langton then clarified that by “exacting” she meant what was covered in IG’s table (covering the nature, duration and frequency of trading) from the perspective of what the FCA prescribed. She accepted that IG’s assessment under COBS 3.5.3R was a further process which required IG to “ensure that our assessment is adequate to get reasonable assurance compared to the way that we could standardise the appropriateness assessment.” She said:

So far as the latter assessment is concerned, she said:

Ms Rogers is IG’s Head of Financial Crime Compliance. In December 2019 she was Head of Compliance Assurance. As appears above, she had been involved in the opening of Mr Tchenguiz’s account with IG. Ms O’Connor referred to her Mr Tchenguiz’s second EPC Application in relation to the third limb of the Quantitative Test: his professional experience requiring knowledge of the transactions envisaged.

As that third limb of the Quantitative Test is central to the dispute between the parties on the Re-Categorisation Issue (including the Qualitative Test which rests upon at least two of the three limbs being satisfied) and Ms O’Connor relied upon what Ms Rogers had said about that in her email of 11 December 2019 (14:54), Ms Rogers’ testimony was the most significant of all.

In cross-examination, Ms Rogers said she had picked up Ms O’Connor’s email quite quickly as her colleague Mr Pike had alerted her to the need to prioritise it.

She said her approach to such applications is quite conservative and risk averse.

Although she had no express recollection of doing so, she was confident that, when considering the application for a professional account, she would have looked at the information provided by Mr Tchenguiz in the Account Opening Application, including his statement “I make my own trading decisions and/or take advice.” She said this would have reflected her general practice.

When the EPC Application was referred to her she says she noticed that the extracts of the SFO Judgment produced by Ms O’Connor referred specifically to CFDs and other forms of derivative contract.

Ms Rogers said that those extracts, in isolation, did not contain sufficient evidence of Mr Tchenguiz’s professional experience. In her witness statement (referring to one of two earlier statements she had made in another set of proceedings connected with the present dispute and arising out of IG’s service of a statutory demand upon Mr Tchenguiz), she said this:

She went on to say that, given the 44 minutes which elapsed between Ms O’Connor’s email of 14:10 and her response at 14:54, it is unlikely that she read the entire SFO Judgment. However, Ms Rogers said, from her initial involvement in the opening of the account, she was aware of Mr Tchenguiz’s dealing with the SFO and that the first few pages of the judgment “provide a very detailed account of Mr Tchenguiz’s background and experience which I would certainly have considered well within the 44 minutes. I may have skim read other parts of the judgment, but I cannot now say for certain.”

In cross-examination (including upon her earlier witness statements made in the statutory demand proceedings) Ms Rogers said she would have been looking at the SFO Judgment “for key information that connected Mr Tchenguiz to a role in a professional context that gave him knowledge.” She specifically recalled the paragraphs explaining Mr Tchenguiz’s dealings on behalf of his family trust through R20 Limited (‘R20’, which is not the same company as R20 Advisory) and the references to CFDs. Noting the reference to CFDs in paragraph 13 of the SFO Judgment (which Ms O’Connor had quoted, alongside paragraph 5), she said: “It is. I believe it’s also mentioned throughout the document as well. And within the intervening paragraphs between those two paragraphs.” In re-examination, Ms Rogers identified paragraph 7 of the judgment as describing the role of R20 and Mr Tchenguiz.

Ms Rogers confirmed that she was not under any time pressure to consider the application and, but for the fact that the Defence had raised a point about it, would not have had a concern that her approval of the third limb of the Quantitative Test took 44 minutes.

Explaining her approach to the application and the language of her email in response to Ms O’Connor, at 14:54, Ms Rogers gave the following answers:

Ms Rogers accepted that the SFO Judgment concerned R20 and not R20 Advisory (the company identified by Mr Tchenguiz in his application). The relevant passage in her cross-examination is as follows:

In a later answer, which recognised that the SFO Judgment showed Investec was a professional trustee of the Tchenguiz Discretionary Trust, Ms Rogers said:

In cross-examination, Ms Rogers also said it was “possible” and, by a later answer, “likely” that she had read the SFO Judgment (by which, I think it is fair to infer, she meant she had considered it generally given its subject matter and length) before Ms O’Connor referred her to it. She had not mentioned this in her witness statement (or either of the earlier statements made by her). Ms Rogers accepted that she had no recollection of doing so but gave those answers because of her email exchanges with Mr Thapa (see paragraphs 59 and 60 above) before Mr Tchenguiz was accepted as a client: “It is likely, given the context of my initial reason for being involved.”

Ms Rogers was asked questions about the EPC Process Document to which Ms O’Connor had referred. She said that Mr Tchenguiz would have fallen within the ‘white list’ (as opposed to the grey list and black list) of roles which provide in depth knowledge of the intended products. Although that list referred to “or directors/managers of those teams” - (i.e the previously listed roles of portfolio management, trader and derivative analysis) - she said she would have “taken ‘or directors’ to have meant directors in the sense of Mr Tchenguiz’s employment.”

Ms Rogers also said in her witness statement that, if the information provided to her on 11 December 2019 had not been sufficient to satisfy the third limb of the Quantitative Test, then she considered it “highly likely” that IG would have unearthed additional information relating to Mr Tchenguiz which would have satisfied the first limb of that test: the carrying out of transactions, on significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters. The relevant market was leveraged over-the-counter derivatives (such as CFDs or spread bets) and to be of a ‘significant’ size the trade had to have a notional value of at least £10,000 by reference to the underlying equity product. She referred to Mr Tchenguiz’s Stock Exchange ‘Notification of Major Holdings’ on 28 November 2019. As appeared from disclosure in these proceedings (and the discussion of him moving RJ O’Brien business to IG upon the agreement of Select Account terms) his 2019 trading activity with InterTrader and RJ O’Brien was significant.

However, those were not matters taken into account in the course of IG’s assessment of the EPC application and IG’s Re-Amended Reply made it clear that IG does not rely upon COBS 3.5.3(2)(a) being satisfied (even though IG denies any suggestion it would not have been).

Ms Barton KC and Mr Lewis urged me treat Ms Rogers’ evidence with some caution. In their closing submissions they highlighted the point that, until she gave evidence, she had not suggested she may already have considered the SFO Judgment before Ms O’Connor provided the link to it. They also referred to her recognising that IG’s lawyers may have been responsible for the language of one particular paragraph in her witness statement which rolled up, in the style of a pleading, a number of references to earlier paragraphs in support of her conclusion that Mr Tchenguiz satisfied the third limb of the Quantitative Test. Mr Tchenguiz’s counsel said her answers in relation to the suggested significance of the matters in some of those paragraphs were evasive. They also referred Ms Rogers’ acceptance that she had received some witness preparation training, though she said this was “only to the sort of very high level”, such as how to address the court and to stick to the facts rather than (as I understood the thrust of her answers) anything approaching a dress rehearsal.

On my assessment of her evidence, Ms Rogers did provide a reliable account of how she acted upon Ms O’Connor’s email of 14:10 on 11 December 2019. However, I find that email was the first prompt for her to consider the SFO Judgment despite the suggestion she may have done so in response to Mr Thapa’s mention of it. That was a suggestion made rather tentatively for the first time in the witness box. She had no clear recollection of having done so and, given that the inquiry at that stage was into the proposed client’s reputation rather than his trading experience, there is no reason why she would have needed to look beyond Mr Thapa’s summary of the outcome of the SFO Judgment. Given the time at which he sent his email from India, there would have been little opportunity for Ms Rogers to have considered the judgment before she forwarded on Mr Thapa’s findings and no incentive to do so before Ms O’Connor’s email of 14:10.

Nevertheless, I accept Ms Rogers’ evidence that, before reverting to Ms O’Connor, she considered the first few pages of the SFO Judgment to put paragraphs 5 and 13 (screenshotted by Ms O’Connor) in context. I therefore accept her further reading included paragraph 7 and other intervening paragraphs of the judgment. The statements in her email at 14:54 that she was “happy to use the experience” Ms O’Connor had highlighted in paragraph 13 and “we understand that he was/is one of the beneficial owners of TDT which traded in derivative products and CFDs as a matter of course and it’s this that we have used to assess the account” are consistent with her having done so.

However, my assessment of her evidence does not support the conclusion that she read beyond the first few pages before she reverted to Ms O’Connor by her email of 14:54. In his closing submissions Mr Mayall accepted that Ms Rogers could not recall reading the further paragraphs of the SFO Judgment (identified in paragraph 171 below) about Mr Tchenguiz’s trading activity.

The SFO Judgment is an important document for the purposes of the parties’ rival arguments as to whether IG complied with its duty under COBS 3.5.6R so far as the third limb of the Quantitative Test is concerned. As appears from Ms Rogers’ evidence, and the terms of her email to Ms O’Connor of 11 December (14:54), she relied upon it in concluding that limb of the test was met. Her email identified paragraph 13 of the judgment (which Ms O’Connor had quoted) and the trading by the Tchenguiz Discretionary Trust and her evidence referred to its first few pages.

It is therefore appropriate to set out first the extracts of the SFO Judgment which Ms O’Connor forwarded to Ms Rogers before summarising what the parties say about them.

Under the link to the judgment, Ms O’Connor quoted paragraphs 5 and 13 (with her yellow highlighting in the latter) as follows:

The intervening paragraphs (concerning Mr Tchenguiz and his interests as opposed to his brother’s), including paragraph 7 identified by Ms Rogers in her evidence, read:

It is therefore paragraph 7 of the SFO Judgment which stated that, as one would expect, the CFD transactions were entered into by the legal owner of the assets of the TDT (the professional trustee) but allowing for the trustee’s fiduciary obligations to the trust and any relevant contractual rights under the consultancy agreement mentioned in its paragraph 8, the investment decisions were taken by R20. Mr Tchenguiz was a director of that company (and the only director identified in those paragraphs).

Ms Barton KC said in her closing submissions that paragraph 7 of the SFO Judgment is the sort of paragraph that “makes trusts lawyers feel slightly unwell”, in that it appears to contemplate an unlawful delegation of the trustee’s investment powers. I am not sure I read it that way (and Ms Barton acknowledged that the passage recognised that the ultimate decision-making lay with the trustees) but, in any event, and in a situation which I believe most trust lawyers would recognise as quite common for offshore trusts, it does record the investment activity of R20 acting by Mr Tchenguiz as a director. Whatever the possible implications might be as a matter of trusts law, the potential significance of this on the application of COBS 3.5.3(2)(c) is obvious.

It is clear from paragraph 6 of the SFO Judgment (referring to paragraph 107) that there were other passages in the judgment which touched upon the role of Mr Tchenguiz and R20. In paragraph 107, the court referred to the role of Investec and continued:

However, although these further statements in the SFO judgment, about Mr Tchenguiz being the deal-maker through R20, were available to IG, I have found that the evidence of Ms Rogers does not support the conclusion that she read them at the time.

Mr Tchenguiz says the information he provided in his second, successful application to open a professional account did not support his re-categorisation as an EPC. He says that whether or not he satisfied the Qualitative Test and Quantitative Test is a question to be determined objectively, by reference to the actual evidence that IG took into account in re-categorising him as an EPC.

I have explained above, by reference to the answers he provided in his application form, how the focus is upon the Qualitative Test and the third limb of the Quantitative Test.

Mr Tchenguiz’s argument that IG failed to take all reasonable steps (per COBS 3.5.6R) to ensure he satisfied the Qualitative Test is not confined to IG’s alleged failure in respect of that third limb. He says (in paragraph 21B of the Amended Defence) that IG also failed to take any sufficient steps to ascertain his ability (in respect of spread bets) to (i) understand the risks involved or (ii) make his own investment decisions. He says the information he provided (in the application to open the account) as to his use of advice in contrast to making his own decisions was equivocal. Further, that information was provided in the context of ‘rarely / never’ trading OTC derivatives. It did not therefore suggest sufficient expertise, experience and knowledge of risk, understanding or investment decision-making in respect of spread bets.

Mr Tchenguiz says the MiFID point-scoring assessment (by which IG simply applied the score of 100, on the opening of his retail account, to the application of the Qualitative Test) was inappropriate. It provided no evidence of his experience in spread betting so as to provide the necessary assurance as to his understanding of the risks involved in that activity. Ms Barton KC and Mr Lewis pointed out that a score of 100 could be achieved without any knowledge of OTC derivatives (as Mr Tchenguiz had achieved it despite his ‘rarely/never’ answer in relation to investing in such instruments). They described IG’s approach to the Qualitative Test as a “watered-down version of the Quantitative Test” so that it was difficult to envisage a circumstance where, if the Quantitative Test was satisfied, the Qualitative Test would not also be met.

In relation to the Quantitative Test, Mr Tchenguiz says the SFO Judgment made the difference between the rejection of the first application for EPC status and the approval of the second. IG had obtained access to the SFO Judgment through their own inquiries. Mr Tchenguiz’s counsel said it was clear from what Ms Rogers had said her 11 December 2019 email to Ms O’Connor (at 14:54) and what Mr Hoq had said in his email to Mr Tchenguiz (at 15:11) that the SFO Judgment made the difference when the description he had given in his application form would not have qualified on its own.

They submitted that the SFO Judgment provided no evidence that Mr Tchenguiz had worked in the financial sector for at least one year in a professional position, which required knowledge of the transactions envisaged. They said the SFO Judgment:

Counsel also observed that IG took no steps to make any further enquiries of Mr Tchenguiz, in the case of any doubt, despite it having been a simple task to ask for further information of Mr Tchenguiz.

Mr Tchenguiz also says that IG failed to comply with COBS 3.5.3(3) in that (per paragraph 23 of the Amended Defence) IG “provided no sufficiently “clear written warning of the protections and investor compensation rights” he might lose for the purposes of COBS 3.5.3(3)(b) in light of COBS 4.5A, or at all.” The Amended Defence particularises the respects in which IG’s email communications and online forms were allegedly deficient in this respect. The reference in IG’s application form to the loss of NBP is said to be insufficient because it did not clearly explain that the liability of a retail client for all restricted speculative investments connected to the retail client’s account is limited to the funds in that account (per COBS 22.5.17) and reference to an “obligation to make additional payments” does not explain that, without NBP, a professional client is exposed to unlimited losses.

More generally, his counsel argued, the form was deficient because it did not include the mandatory risk wording that was required in a communication to a retail client (COBS 22.5.6) and it did not explain the relationship between margin (the extent to which an account is leveraged) and the client’s exposure to risk, absent which the relative benefit of NBP (or risk its loss) could not properly be understood.

On behalf of IG, Mr Mayall said this inquiry about Mr Tchenguiz satisfying the Qualitative Test and the Quantitative Test was taking place in what he described as this “wholly unreal” situation. Mr Tchenguiz’s experience of spread betting (at the relevant time) appeared from the terms of the CMC Spreadbet judgment. Paragraph 5 of IG’s Amended Particulars of Claim relied upon what had been said in the skeleton argument of leading counsel (not Ms Barton KC) who appeared for Mr Tchenguiz in the statutory demand proceedings in saying: “It has further been asserted on behalf of the Defendant that the Defendant was no mere speculator but an experienced investor pursuing a considered, coherent and long-term investment strategy in FirstGroup plc.”

Mr Mayall referred to the ‘Questions and Answers’ document published by the ESMA in relation to investor protection under MiFID II and MiFIR (‘the ESMA Guidance’). ESMA performs a role in the harmonisation of financial markets, after the global financial crisis, by Regulation (EU) No 1095/2010 and it made a number of Decisions which came to be reflected in COBS 22.5. Mr Ward had referred to “ESMA Regulation” in his email to Mr Tchenguiz of 11 December 2019 (11:18) recommending the upgrade to a professional account.

The ESMA Guidance was published to promote common supervisory approaches and practices in the application of those legislative instruments and to provide competent regulatory authorities and firms with clarity over their requirements. Section 11 of the ESMA Guidance (last updated 25 May 2018 for present purposes) addressed how a firm should assess whether a private individual investor may be treated as a professional client.

Mr Mayall highlighted the following aspects of the ESMA Guidance in that document:

Mr Mayall stressed that the guidance in relation to the “knowledge of the transactions or services envisaged” (per the third limb) could be acquired through client involvement in transactions with comparable features and a comparable level of complexity. For present purposes, Mr Tchenguiz’s experience (as IG suggests it was) in trading in CFDs would be sufficient even if they were not spread bets.

IG makes the point that a spread bet is a type of CFD. The FCA Handbook defines a CFD as follows:

Mr Mayall submitted that IG’s approach to the Qualitative Test using the MiFID score at account opening was an entirely reasonable way of assessing whether Mr Tchenguiz was capable of making his own investment decisions and understanding the risks involved in spread betting. He made the point that Mr Tchenguiz had applied to open an account with IG for both spread bets and CFD trading and the answer he gave in response the question about his experience or qualifications relevant to his understanding of those products was that he had this “from a relevant role in a financial institution”. Mr Tchenguiz had confirmed his understanding (see paragraph 70 above) that spread bets and CFDs are complex instruments which come with a high risk of losing money rapidly due to leverage.

IG says that using the MiFID score of 100 to conclude the Qualitative Test was satisfied was entirely reasonable when 80 of those points were earned through Mr Tchenguiz trading (independently or with advice) in exchange-traded derivatives. Those were transactions with features and a level of complexity comparable to spread bets for the purposes of the ESMA Guidance. The remaining 20 points were attributable to Mr Tchenguiz referring to his directorship within the finance industry. The answers he gave earlier that day on the opening of the account were sufficient to provide IG with the reasonable assurance required by the application of that test.

In relation to the third limb of the Quantitative Test, IG makes the obvious point that, in response to the question the firm asked Mr Tchenguiz as to how his role with R20 Advisory had given him knowledge of CFDs, spread bets or forex, he gave an answer, which amplified that given on the previous unsuccessful application to become an EPC, by also referring to “margined products”. Mr Tchenguiz was therefore certifying that his role as a director of R20 Advisory had given him that knowledge when, Mr Mayall observed, if it had not done so, he would have responded along the lines “it has not”.

Although IG says Mr Tchenguiz’s position on the Re-categorisation Issue is a technical one or, as Mr Mayall also put it, “totally unmeritorious in the real world”, the objective nature of the inquiry under COBS 3.5.3(2)(c) does require the court to focus upon the material obtained by IG in the course of its assessment of his eligibility to be treated as a professional client.

Mr Mayall submitted that the task of the court is to determine whether the relevant criteria under the Quantitative Test were satisfied. In other words, that is a narrower inquiry than one involved in a decision as to whether Mr Tchenguiz met or did not meet the requirements to become an EPC (and narrower also than the assessment by IG required on the application of the Qualitative Test). The approach, Mr Mayall contended, is different from that under the Qualitative Test, which requires an assessment by the firm, and, therefore, on any later review of that assessment by the court involves the court looking at what the firm then took into account. By contrast, he said, consideration of the relevant limb of the Quantitative Test simply requires the court to consider whether the evidence, obtained by IG in the course of the assessment required by the Qualitative Test, showed that Mr Tchenguiz had worked in the financial sector for at least one year in a professional position which required knowledge of CFDs.

He relied upon the paragraphs in the SFO Judgment set out in paragraphs 167 and 168 above as evidence that, not as a beneficiary of the TDT but, as a director of R20, Mr Tchenguiz was advising the trustees what to do and he was advising them to purchase huge stakes in companies by way of CFDs and other types of derivative investments. Ms Barton told me that R20 was now dormant. Mr Mayall said R20 Advisory is the successor company to R20 and took over its role in around 2010. This was not challenged on behalf of Mr Tchenguiz and, although his witness statement did not form part of the evidence at trial, it appears unlikely there would have been grounds for doing so. In the judgment in the CMC Spreadbet case, at [38], the judge referred to what Mr Tchenguiz had said in his application to CMC (to become an EPC) about R20 Advisory taking over in 2010 the asset management, corporate finance and consulting services provided by R20 prior to that date.

In relation to the requirement under COBS 3.5.3(2)(c) that the work in the financial sector in a professional position should be “for at least one year”, IG says the SFO Judgment showed that to be case. Mr Mayall said the SFO Judgment evidenced that and, adopting an objective approach to that “evidence” (for that limb of the Quantitative Test) in these proceedings, that was so regardless of whether or not Ms Rogers had read beyond its paragraphs 5 and 13. The evidence within the judgment about Mr Tchenguiz’s professional role was not in any sense out of date. The language of COBS 3.5.3(2)(c) (“works or has worked”) shows that past work qualifies. COBS 10A.2.6, which precludes a firm from relying on information which it is aware or ought to be aware is manifestly out of date, relates to information provided by the client. The SFO Judgment was, by contrast, a matter of public record. As the Divisional Court had said what it said, there was no purpose in reverting to Mr Tchenguiz with further enquiries about what the court had said about him and R20.

IG’s position is that the third limb of the Quantitative Test was satisfied simply by reference to the SFO Judgment but, even without it, it was satisfied by what Mr Tchenguiz had said about his directorship of R20 Advisory in the part of his application to become an EPC which responded to the question based upon that part of the test.

Mr Mayall said that Mr Tchenguiz’s allegation that IG had breached COBS 3.5.3(3) – what he described as “the process arguments” because that part of the rule prescribes the procedure on categorisation of an EPC – were hopeless.

He pointed out that the email which Mr Ward sent to Mr Tchenguiz on 11 December 2019 (at 12:10) inviting him to apply to open an account, contained (within what is a rather dense block of uniform text in a footer running to some 29 lines) the following warning:

The same footer appeared on IG’s subsequent emails sent to Mr Tchenguiz. In fact, in other emails, such as the two sent to him confirming his account with IG had been opened (so at the time he was a retail client), the warnings stood out a little more clearly, as follows:

Mr Mayall highlighted the warnings about loss of NBP contained in the EPC Application form which Mr Tchenguiz confirmed he understood: see paragraphs 75 to 78 above.

ANALYSIS AND DETERMINATION OF THE RE-CATEGORISATION ISSUE

The relevant provisions of COBS are set out in Section D above.

COBS 3.5.3R sets out the procedure to be complied before a firm may treat a client as an EPC. Although only COBS 3.5.3(3) uses the word “procedure” (and that part of the rule focuses upon certain requirements in relation to the relevant account opening documentation and provisions which Mr Mayall therefore described as giving rise to “the process arguments”) COBS 3.5.3(1) describes a procedure for an assessment aimed at establishing, by reference to a certain standard of investor competence, the eligibility of the client to be treated as an EPC. COBS 3.5.3(2) says what that assessment involves in relation to MiFID business.

COBS 3.5.6R makes further provision in relation to that assessment and, again, makes it clear that a client may only be treated as an EPC (the language is “[b]efore deciding to accept a request for re-categorisation”) if, in relation to such business, the procedure in relation to the Qualitative Test and the Quantitative Test is first observed.

COBS 3.5.6R does not address the requirements of COBS 3.5.3(3) in relation to the necessary request, warnings and acknowledgment of consequences within the relevant documentation. If an issue subsequently arises over a firm’s compliance with any of them, then the documents will speak for themselves without the need for further elaboration in the rules by reference to “all reasonable steps”.

In relation to the Qualitative Test and (where applicable, as here) the Quantitative Test, the effect of COBS 3.5.3R and COBS 3.5.6R, working in combination, is that the firm must “take all reasonable steps to ensure” (per COBS 3.5.6R) that the client satisfies the tests.

So far as the Qualitative Test is concerned, that means the firm must take all reasonable steps to ensure it “undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance ….. that the client is capable of making his own investment decisions and understanding the risks involved”. The words omitted from that quote show that such capability and understanding is to be assessed (to the benchmark level of the assessment providing reasonable assurance of both) “in light of the nature of the transactions or services envisaged.”

I am speculating when saying use of the phrase “the nature of the transactions envisaged” may well reflect consideration of the likely difficulties, and possible unintended consequences, of attempting to define with greater specificity the actual transactions which the would-be EPC would like to undertake. In any event, the ESMA Guidance relied upon by Mr Mayall (addressing equivalent language in the Quantitative Test) confirms that the language used does not mean that the firm needs to establish that the applicant already has a level of expertise, experience or knowledge acquired through entering into transactions of exactly the same type. Instead, the focus is upon him having acquired such through transactions having comparable features and a comparable level of complexity: see paragraph 185 above. Neither the Qualitative Test nor the Quantitative Test (see below) requires the applicant for EPC status to have an established track record of investing in transactions of the same particular type as he wishes to trade as an EPC (even assuming, as I do at least for the purposes of this observation, that a spread bet with NBP is to be categorised as the same type of transaction as one without NBP).

Therefore, the effect of the two rules working in combination is that the duty upon the firm is to take “all reasonable steps” to ensure that the client has what (in summary of the Qualitative Test) I have described in summary as the requisite level of investor competence. Although the word “ensure” in COBS 3.5.6R imports a requirement of certainty, the language of the Qualitative Test does not require some objective benchmark (or score) to be reached. Instead, the application of that test is aimed at producing a result which gives (or does not give) the firm “reasonable assurance” as to the investor’s competence. There is an element of subjectivity in this test aimed at the firm’s assessment of the investor’s competence, though any assurance it gets in that regard has to be a reasonable one.

Within the application of that test there is, however, an element of grading or scoring: the Quantitative Test. The Quantitative Test (as its name implies) does import an objective, criterial element to the assessment. The Quantitative Test is an objective one.

That said, the third limb of the Quantitative Test in issue in this case, is the least purely ‘quantitative’ of the three. It does require the objective facts of working in a professional position in the financial sector for at least one year to be established but the investment knowledge which that work “requires”, and which, as I read COBS 3.5.3(2)(c), the firm may therefore assume was knowledge the applicant in fact had by virtue of that professional position, is expressed in terms broadly equivalent to the standard of investor competence (as I have summarised it) identified by the Quantitative Test.

I recognise that any employer or client of the professional, during that year, may well have needed more than a “reasonable assurance” of such competence, to have wanted more concrete as opposed to abstract evidence of the professional’s knowledge of the relevant transactions than that indicated by the test, and to have known as much about the benefits as “the risks involved” in them. However, there is otherwise a substantial overlap between this limb and the more subjective Qualitative Test. Clearly, on its language, COBS 3.5.3(2)(c) does not stipulate that the applicant’s (presumed) knowledge should have been deployed within that year in initiating, approving or concluding transactions of a specified number, magnitude or type; and the ESMA Guidance makes it clear (with my emphasis) that the position must have been “professional in nature and held in a field that allowed the client to acquire knowledge of transactions or services that have comparable features and a comparable level of complexity.”

Despite the objective elements of the Quantitative Test, it is less obvious that Mr Mayall is correct to say that it is enough that the evidence which satisfied this contentious limb of it (COBS 3.5.3(2)(c)) was obtained by IG in the course of the assessment even though (which IG of course disputes) IG did not rely upon that part of the evidence which established as much. In exchanges with counsel, I used the perhaps uncomfortable analogy of a judge reaching the wrong conclusion on the evidence actually relied upon by him/her even though there was other evidence before the court, not in fact referred to or relied upon, which would have supported the judge’s conclusion. The judge’s conclusion would be vulnerable to challenge on an appellate review. Ms Barton KC said that would indeed be so, subject to any respondent’s notice to uphold the decision on different grounds.

The uncertainty over Mr Mayall’s submission, as I perceive it to be, arises out of the introductory words of the Quantitative Test: “…. in the course of that assessment, at least two of the criteria are satisfied ….” The language of the test does not refer to evidence, as such, and therefore it does not grapple with the question of whether it is sufficient to obtain such evidence, before accepting the client as an EPC, or whether it must be obtained and reviewed before such acceptance.

Although this point calls for greater analysis than one resting upon a simple comparison, I note that there is some support for Mr Mayall’s interpretation of the rule in the stance adopted by Tchenguiz on the second of the three criteria (within the Quantitative Test) which IG relied upon.

I have already mentioned that the Amended Defence (paragraph 20) says IG failed to take all reasonable steps to satisfy itself that Mr Tchenguiz’s financial instrument portfolio exceeded €500,000 (per COBS 3.5.3(2)(b)) even though Mr Tchenguiz accepts it did exceed that amount. In other words, the point was made that IG had in that respect failed to take all reasonable steps, as required by COBS 3.5.6R, and it was for IG to establish otherwise. In the event, however, this was not an issue for trial. In their written opening for trial (paragraph 71) his counsel confirmed:

As Mr Mayall observed, if IG had indicated they were proposing to reject the EPC application by reference to the wealth requirement then Mr Tchenguiz would have responded by backing the application with evidence of his cash and investments. In my judgment, a similar point can be made about the issue between the parties over COBS 3.5.3(2)(c)), so far as the significance of the SFO Judgment on the inquiry into Mr Tchenguiz’s professional experience is concerned.

If a more leisurely and prolonged reading of the terms of that judgment than that undertaken by Ms Rogers on 11 December 2019 (including the paragraphs identified in paragraph 171 above which I have found she did not read on the day) supports the conclusion that Mr Tchenguiz did in fact satisfy that limb of the Quantitative Test then his challenge that IG did not find out more about his professional experience (including by reading on to those later paragraphs in the judgment) is somewhat blunted.

I say that because paragraphs 109 and 110 of the SFO Judgment make it clear that Mr Tchenguiz, through his directorship of R20, was responsible for the decision-making on the deals in the CFDs and other derivative transactions entered into by the trustees of the TDT. Because he was applying to become an EPC, and Mr Ward had flagged the regulatory requirements for that, the court can and should assume that Mr Tchenguiz would (if IG had asked for further information about the value of his financial instrument portfolio, as his Defence suggests he should have been) have corroborated the information given in the Account Opening Application and the EPC Application which was relevant to COBS 3.5.3(2)(b). Likewise, if, on the basis of what Ms Rogers had read, IG had formed the preliminary view that the SFO Judgment had the limitations suggested by his counsel (see paragraph 178 above) then the court can assume that Mr Tchenguiz would have wished to draw attention to what was said elsewhere about his decision-making.

As the EPC Application had identified R20 Advisory (as opposed to R20) as his “most relevant employer”, I think I may also assume that it is likely that any such further exchanges between IG and Mr Tchenguiz, over the COBS 3.5.3(2)(c) requirement, would have cast further light over the relationship between that company and the one mentioned in the SFO Judgment. As it is, there were none. Although there has been no direct evidence on this point, it does appear that R20 Advisory took over role of R20. I have already noted that Mr Mayall told me that R20 Advisory took over its role in around 2010. The deal-making activity of R20 appears from the SFO Judgment and the equivalent activity of R20 Advisory was summarised by Mr Tchenguiz in the EPC Application. He was a director of both companies.

Nevertheless, on the point about the degree of objectivity within the Quantitative Test, I have concluded that if a firm is to rely upon it having obtained evidence to support a client’s claim that a particular limb of the test is satisfied then it needs also to have reviewed and relied upon that evidence in the course of its assessment.

That is what one would expect as part of an assessment undertaken to establish the client’s competence as an investor in transactions of the nature he would like to undertake as an EPC. Addressing the situation where the firm should avoid relying solely upon the client’s self-certification, the ESMA Guidance refers to the firm “obtaining further evidence to support assertions”. Evidence is generally of no value if the relevant decision maker does not rely upon it; the firm in this situation undertaking its own objective assessment of the client’s own subjective view as to his expertise, knowledge and experience.

COBS 3.5.6R requires a firm to take “all reasonable steps” to ensure the client satisfies the Quantitative Test and, in my judgment, that means that if the firm obtained the evidence in fulfilment of that obligation then it is reasonable to expect it to have considered it in the application of the test. To be more precise, the firm would fall short of that obligation (i.e. would not have taken all reasonable steps) if it obtained the evidence but did not consider it “before deciding to accept” the client’s request for categorisation as an EPC. On any review of the firm’s decision by the court, there ought not to be scope for an argument which has the flavour of a respondent’s notice on an appeal (and which some of the argument about the significance of the SFO Judgment perhaps had).

This interpretation of the Quantitative Test, pointing to the need for a clearer audit trail of the firm’s decision, is supported by the language of COBS 3.8.2(2)(c) which requires the firm to make (and keep for 5 years) a record of its categorisation of the client “including sufficient information to support that categorisation.”

My interpretation is also consistent with the decision of Flaux J (as he then was) in Bank Leumi (UK) Plc v Wachner [2011] EWHC 656 (Comm). In that case the court was concerned with rules in the then Conduct of Business Rules (in COB 4.1R) which required a firm to take reasonable care in determining that a client had sufficient experience and understanding to be classified as an intermediate customer. The judge was addressing the client’s claim for damages for breach of statutory duty (then under section 150(1) of FSMA) based upon an alleged contravention of that rule. He recognised (at [213]-[220]) that previous cases emphasised that the client classification rules were process driven. Their focus was upon the firm’s compliance with procedural requirements rather than it arriving at an objectively correct classification of the client. Flaux J said this of the rules under consideration (with his emphasis) at [214]:

In my judgment, the evidence shows that IG complied with both of these rules. In my findings below, I also express matters in terms of Mr Tchenguiz having failed to prove the relevant contravention. In expressing myself that way I recognise that there is no counterclaim and that it is for IG (relying on a contract with him on EPC terms) to prove its case in debt. Nevertheless, it is Mr Tchenguiz who is impugning the contract, by reference to the alleged contraventions which undermine his EPC status and (as the flow of the parties’ pleaded cases bears out) he is the party making allegations which undermine his EPC status.

The evidence shows how IG in fact approached the Qualitative Test on what might be said to be a ‘quantitative’ basis: the firm applied Mr Tchenguiz’s MiFID score of 100 at account opening to conclude, in accordance with the EPC Process Document and Online Procedure, that he satisfied the test.

However, it does not follow, as was suggested on behalf of Mr Tchenguiz, that IG’s approach to the Qualitative Test therefore fell short of what was required under that test.

For me to decide that it did fall short would involve a finding that the firm’s policy set out in EPC Process Document and Online Procedure (which Ms O’Connor applied) was somehow wrongly targeted and/or deficient. In my judgment, there is no basis for such a finding.

The Online Procedure was created in November 2017 and revised in March 2018 by Lauren Lamarque, a Compliance Officer who Ms Gore Langton explained formed part of the UK compliance team. It is clear from its terms that IG considered the procedure “shows how IG takes all reasonable steps to ensure that the client requesting to be treated as an elective professional client satisfies the qualitative test and, where applicable, the quantitative test.”

IG’s belief that it shows that does not of course mean that the belief is well-founded. However, there can be no suggestion that IG’s policy did not have the requirements of the Qualitative Test clearly in mind. The Online Procedure clearly stated that actual trading experience was the only measure IG would use on the qualitative test (and that the client’s self-certification of an understanding of the risks or any theoretical knowledge would not be considered) and that:

Ms Gore Langton, IG’s Chief Compliance Officer at the time of the EPC Application, explained and effectively vouched for the scoring system which resulted in Mr Tchenguiz achieving the required 100 points. She gave a rational and convincing answer as to why, under the scoring system set out in the Online Procedure, Mr Tchenguiz achieved 40 points (before doubling for him trading them independently or with advice) for the number of his recent trades in exchange-traded derivatives.

That point score was by reference to the relative complexity of such products; a point illustrated by a scoring system which produced the same number of points where the client trades in either ETDs or OTC derivatives (the category in which Ms Gore Langton would place spread bets) was between 10 and 20 in number. Ms Gore Langton recognised that Mr Tchenguiz obtained no points for trading OTC derivatives fewer than 10 times but the policy of awarding some points for his ETD trading (albeit only 40 compared with the 100 he would have obtained had he traded that number of OTC derivatives) is entirely consistent with what the ESMA Guidance says about assessing the client’s experience by reference to transactions with comparable features and a comparable level of complexity.

The information given by Mr Tchenguiz about his trades in the last 3 years, upon which the score was based, and his position with R20 Advisory (which his answer in the EPC Application – “R20 advises” - indicated was an ongoing role) was plainly not “manifestly out of date” within the meaning of COBS 10A.2.6.

In my judgment, Mr Tchenguiz has failed to establish that IG’s use of the MiFID score in determining the Qualitative Test was inappropriate. Many perhaps most assessments are calculable (cf. the Quantitative Test which forms part of it) and he has not made out any good reason for saying IG’s scoring system was flawed. Any argument that it was somehow inherently flawed would of course have required the court to consider not only whether particular marks awarded by IG were too generous but also perhaps not generous enough (when measured against the benchmark score required of an EPC) and/or that the benchmark of 100 for an EPC was set at the wrong level. The evidence adduced by IG, which I accept, undermines such an argument.

IG’s adherence to the Online Procedure, as explained by Ms Gore Langton, shows that IG took all reasonable steps in its assessment of Mr Tchenguiz’s competence to trade spread bets as an EPC. The answers he gave provided IG with the reasonable assurance required by the Qualitative Test.

Mr Tchenguiz has therefore failed to prove that IG contravened COBS 3.5.3(1) (or, as a consequence, COBS 3.5.6R).

I have explained my reasons above for concluding that the key question to be addressed under COBS 3.5.3(2)(c) is whether IG both obtained and, before categorising Mr Tchenguiz as an EPC, reviewed evidence which showed that he had worked in the financial sector for at least one year in a professional position which required knowledge of transactions having features and a level of complexity comparable to spread bets.

IG’s evidence shows that the answer to that question turns on what the passages in the SFO Judgment read by Ms Rogers (before she reverted to Ms O’Connor by her email of 14:54 on 11 December) showed in that regard.

I have expressed my finding that Ms Rogers read the passages in the SFO Judgment set out in paragraphs 167 and 168 above, though not those set out in paragraph 171.

Her email of 14:54 on 11 December2019 in fact referred to Mr Tchenguiz’s experience and position as a beneficiary of the TDT. However, it is important to note (as the language of the email, responding to Ms O’Connor’s highlighting in paragraph 13 of the SFO judgment, makes clear with its references to derivatives and CFDs) the language of that email, so far as COBS 3.5.3(2)(c) is concerned, appears to focus upon the subject matter of his “knowledge” rather than the “professional position” which required it.

So far as the latter was concerned, paragraph 7 of the SFO Judgment confirmed that Mr Tchenguiz was during the period identified in those early paragraphs of the judgment (2007 to 2010) a director of R20 which gave instructions to the trustee of the TDT in relation to CFDs and other forms of derivative contract. The evidence within the judgment did not have the limitations suggested by his counsel. It showed that Mr Tchenguiz had significant experience of CFDs and, consistent with the ESMA Guidance, IG were entitled to act upon that in concluding he had the required knowledge to trade products of comparable complexity as those identified in the Account Opening Application: “both spread betting and CFDs”.

I accept Mr Mayall’s submission that the SFO Judgment was not in any sense out of date (when the language of the test expressly contemplates past as well and continuing professional work in the financial sector) and, in that particular respect and more generally, the judgment corroborated what Mr Tchenguiz said in the EPC Application. In that application he identified R20 Advisory, not R20, as his most relevant employer but that did not diminish the corroborative effect of the SFO Judgment by reference to his other directorship. There is no dispute that a directorship of R20 (given what the SFO Judgment says about its activity in the financial sector) or R20 Advisory (given what Mr Tchenguiz said about that company in the EPC Application) was/is a professional position within the meaning of COBS 3.5.3(2)(c). He said his directorship of R20 Advisory gave him knowledge of spread bets and CFDs as the company’s activities extended to advising on investments in margined products.

There was no reasonable basis for IG to conclude that what Mr Tchenguiz said in the EPC Application was manifestly out of date, incomplete or inaccurate and they were therefore entitled to rely on it in accordance with COBS 10A.2.6. By obtaining the SFO Judgment IG looked beyond Mr Tchenguiz’s self-certification, as the ESMA Guidance suggests should be done where there is reason to doubt its conclusiveness on the point, and the terms of the judgment supported what he said.

In my judgment, IG took all reasonable steps to ensure that Mr Tchenguiz satisfied this limb of the Quantitative Test.

Mr Tchenguiz has therefore failed to prove that IG contravened COBS 3.5.3(2)(c) (or, as a consequence, COBS 3.5.6R).

I have by that heading adopted Mr Mayall’s description of Mr Tchenguiz’s argument based upon a breach of COBS 3.5.3(3).

I agree with him that Mr Tchenguiz’s argument on this part of the Re-categorisation Issue is hopeless.

Ms Barton KC and Mr Lewis submitted that IG’s warnings of the loss of NBP were inadequately expressed and, in IG’s email footers, did not appear with sufficient prominence.

Mr Ward’s evidence was that he was relying upon the documentation for the EPC Application, rather than his own email footers, to provide the necessary warning to Mr Tchenguiz that he would lose NBP.

In my judgment, Mr Tchenguiz’s case that he was not given adequate warning of the loss of that protection cannot stand in the face of his own acknowledgment of the risk in the EPC Application (see paragraph 77 above) and what was said in the email informing him his second EPC Application had been successful (paragraph 103 above).

In the CMC Spreadbet case, the court considered the requirements of COBS 4.5A.3, the material parts of which I have set out in paragraph 53 above. The deputy judge, Mr Elvin QC, said this:

Mr Mayall relied upon the second paragraph as a statement of the law. Ms Barton KC said it was not, on a proper application of the rules, and I presume this would have been an issue for determination in the appeal from the judgment in that case which was later compromised.

In the present case, I think it safer to act only upon the requirement of COBS 4.5A.3(d): that the warning as to loss of NBP was “sufficient for, and presented in a way that is likely to be understood by, the average member of the group to whom it is directed, or by whom it is likely to be received.”

Applying that test, there is no basis for concluding the warnings mentioned above were somehow deficient. By their very nature, they were directed to clients who (under IG’s MiFID scoring system) had achieved at least 100 points for the purposes of the Qualitative Test. Mr Tchenguiz was (as IG established and I have recognised) a member of the group to whom the warning about loss of NBP was directed, namely clients eligible to become EPCs. It may be that he would have been held to a higher average level of understanding within that group (as he scored 100 points and no more) but the fact is that there has been no evidence from him that he did not understand them. Nor has there been any other evidence, or persuasive argument, as to why the average applicant for EPC status would not or might not have understood the warnings to mean what they appear to say.

I am satisfied on the evidence that IG complied with COBS 3.5.3(3).

Mr Tchenguiz has therefore failed to prove that IG contravened that rule.

Mr Tchenguiz cannot succeed on the NBP Defence in light of my conclusion on the Re-categorisation Issue.

Nevertheless, it is appropriate to address it when it was fully argued. Ms Barton KC submitted that it is plain that in the CMC Spreadbet case the deputy judge, despite finding against Mr Tchenguiz on the facts of that case in relation to his categorisation as an EPC, accepted that the legal analysis advanced by her and Mr Lewis (in that case) in relation to NBP was the correct analysis. Ms Barton told me that full submissions were made in that case (after the conclusion of the trial) upon what I have described as the NBP Defence and, although the judgment did not address the rival analyses, she submitted it was clear that the judge would have found that, if Mr Tchenguiz had not properly been classified as an EPC, then the debt claimed by CMC would not have arisen.

However, I have already observed that the language of paragraphs 90 and 91 of the judgment in that case leaves open, for any subsequent decision, the legal analysis by which Mr Tchenguiz would have benefited from NBP had it “applied”. I note from paragraphs 8, 9 and 19 of the judgment that Mr Tchenguiz had counterclaimed for damages under section 138D(2) of FSMA; though I recognise the counterclaim may only have been directed to the close-out issue which the judge went on to consider. In any event, the CMC Spreadbet case plainly does not assist with an analysis of the interrelationship of section 138D(2) and section 138E of FSMA so far as the NBP Defence is concerned.

The NBP Defence turns on a question of pure law.

I have set out the NBP conferred on retail clients by COBS 22.5.17 in paragraph 50 above. It clearly provides that a retail client cannot lose more than the funds in his account.

As the Guidance in the subsequent paragraphs of the FCA Handbook states, COBS 22.5.17R means that a retail client cannot lose more than the funds specifically dedicated to trading restricted speculative investments. For these purposes, the funds in a retail client’s account are limited to the cash in the account and unrealised net profits from open positions. “Unrealised net profits from open positions” means the sum of unrealised gains and losses of all open positions recorded in the account. Any funds or other assets in the retail client’s account for purposes other than trading restricted speculative investments should be disregarded.

Relying upon his case on the Re-Categorisation Issue Mr Tchenguiz says that IG’s failure to comply with COBS 3.5.3R (and COBS 3.5.6R) means that IG was not entitled to classify him as an EPC and (in accordance with COBS 3.4) he remained a retail client with the benefit of NBP.

Section 138D(2) of FSMA provides as follows:

Section 138E of FSMA provides:

Mr Tchenguiz’s case on the NBP Defence was based on a contravention of COBS 3.5.3R and 3.5.6R, meaning he did not lose NBP, though a looser analysis could be said to involve, as a consequence, IG contravening COBS 22.5.17R by disapplying NBP when it should not have done so.

As explained in COBS 1.2.1G (and the parenthetical note between them identifying the relevant article of MiFID II) COBS 3.5.3R and 3.5.6R each transposed provisions of MiFID. Nevertheless, they are rules (as defined by section 417(1) of FSMA) within the meaning of sections 138D and 138E. At the trial, the parties did not identify the relevant instrument or instrument by which the FCA made these rules. Regulatory developments over the years mean that the language (and primary legislative source) of the provisions has changed over the years, through the FCA making numerous instruments, so that would be no easy task.

In section B above I have noted that the argument has focused upon COBS 3.5.3R and COBS 3.5.6R introduced with effect from 3 January 2018 in implementation of MiFID II. However, a search of the FCA website indicates that the Qualitative Test and Quantitative Test were first introduced (in those rules) by the then Financial Services Authority under the Conduct of Business Sourcebook Instrument 2007, FSA 2007/33, the material provisions of which came into force on 1 November 2007. This was in implementation of MiFID: the Markets in Financial Instruments Directive 2004/39/EC. So far as the (more recent) rule-making powers of the FCA identified in section 138E(3) are concerned, none of those are identified in that 2007 instrument which was made first and foremost by reference to what was then the FSA’s general rule-making power under section 138 of FSMA (which for the FCA is now found in section 137A).

I have mentioned in Section D above that COBS 22.5.17R was introduced by the 2019 Instrument. As I observed during counsel’s closing submissions, the 2019 Instrument was made by the FCA in the exercise of five separate powers under FSMA. They included its power under section 137A to make general rules and also its power (within that wider one – see the language of section 137D(1)) to make general rules in relation to product intervention under section 137D. As appears above, rules made by the FCA under section 137D are not covered by the provision which states that a contravention of the rule will not make a transaction void or unenforceable; though, as I explain below, the language of section 137D(7)(a) suggests it would be more accurate to say such rules may not be covered by the provision. If, however, the source of COBS 22.5.17 is the rule-making power under section 137A then section 138E(2) of FSMA will apply.

COBS 22.5.17R does not perhaps at first sight have the appearance of a product intervention rule. Section 137D(1) and (2) describe product intervention rules by reference to the prohibited things of “entering into specified agreements with any person or specified person”, or doing so unless requirements specified in the rules have been satisfied, or doing anything that would or might result in the entering into specified agreements by persons. During closing submissions, in response to me focussing upon Section 137D and those quoted words, Mr Mayall drew my attention to section 137D(3) and (4) which provide that those terms take their meaning from what the FCA specifies in any general rules (as defined by section 137A(2)). Counsel were not able to identify any further reference to “specified agreements” or “specified persons” in the relevant parts of COBS.

The focus in closing submissions upon the reference in the 2019 Instrument to the FCA’s rule-making power under section 137D prompted a debate between counsel about whether or not the reliance placed upon it by Ms Barton KC in closing submissions should have been foreshadowed in a statement of case or, as Mr Mayall remarked, at least in a skeleton argument. He had already made the wider point that his opponent had not addressed the impact of section 138E(2) either in a pleading or skeleton argument. IG had pleaded section 138D in the Re-Amended Reply (in saying that at most the contraventions alleged by Mr Tchenguiz would give rise to a claim for damages) though not section 138E(2). Subject to Ms Barton’s point that IG had not pleaded reliance upon section 138E(2) in that Reply (though Mr Mayall had set out the subsection in his Note for CCMC dated 17 January 2023 and it did feature in his written opening for trial which her own and Mr Lewis’s followed) I observed that the section 137D point appeared to be the stuff of a notional rejoinder.

Although hindsight reveals that it would have been preferable for the point to have been flushed out sooner than the last day of trial, it is a point of law (within a wider point of law) and, particularly in the light of my conclusion on the Re-categorisation Issue, I have felt able to proceed to determine it without asking counsel to supplement their oral observations on the point.

Again, searching the FCA website for the purposes of preparing this judgment, it seems to me most likely that the reference in the 2019 Instrument to the exercise of the power to make product intervention rules is referable to what was said in the FCA’s Consultation Paper of December 2018 (CP 18/38) – titled ‘Restricting contract for difference products sold to retail clients and a discussion of other retail derivative products’ - which preceded the making of it.

In Chapter 3 of that Consultation Paper the FCA outlined its “proposed product intervention measures” and began by saying this:

Those proposals were implemented in COBS 22.5 generally.

COBS 22.5.17R does not in terms say a firm cannot enter into a spread bet agreement without NBP with a retail client. Instead, it provides that the liability of a retail client under a spread bet is limited by NBP. However, the third bullet point in the quote above indicates that COBS 22.5.17R should be regarded as the result of the FCA’s exercise of its power under section 137D of FSMA to make product intervention rules. In other words, in the light of what the FCA had said in CP 18/38 (and the recital of section 137D in the 2019 Instrument) the rule can, at least for the purposes of the present issue, be read as saying the sale of a spread bet without NBP (a “specified agreement”) to a retail client (a “specified person”) is indeed prohibited. The provisions of section 137D(6), which refers to requirements as to terms and conditions to be included in specified agreements, supports the categorisation of COBS 22.5.17 as a product intervention rule.

That said, a sale to an EPC (or other professional client) of a spread bet without NBP is obviously not prohibited – hence the very existence of this litigation – and that is why Mr Tchenguiz had to focus his case upon the alleged contravention of COBS 3.5.3R and COBS 3.5.6R so that, he argued, he remained at all times during his trading with IG a retail client. In this regard I note (with my emphasis in underlining) that section 137D(2)(b) of FSMA prohibits “entering into specified agreements with any person or specified person unless requirements specified in the rules have been satisfied”.

Consistent with Mr Tchenguiz’s pleaded case, therefore, the relevant contravention (if there had been one) would have been of those earlier rules in COBS without which the suggestion of a resulting contravention by IG of COBS 22.5.17R (through impermissible reliance upon it) simply has no basis. As I have explained, COBS 3.5.3R and 3.5.6R fall clearly within the language of section 138E(1) and (2) of FSMA, not section 138E(3).

In fact, as I observed during counsel’s closing submissions, it is also clear that not every contravention of a product intervention rule made under section 137D leads to the contravening transaction being unenforceable. Section 137D(7) says that, in relation to contravention of product intervention rules, the rules may provide for a “relevant agreement or obligation” (as defined by s. 137D(8)) to be unenforceable against any person or specified person. The same subsection also says the rules may provide for the recovery of money or property transferred under it or for the payment of compensation. In other words, not every rule made under section 137D falls within the proviso in section 138E(3)(b) of FSMA.

No part of COBS relied upon in this case – not even COBS 22.5.17R - states that a contravention of the rule means that a spread bet (or a spread betting account) without NBP is unenforceable against a retail client. Perhaps because of the way the rule is expressed, COBS 22.5.17R is not a rule in relation to the contravention of which the FCA exercised its power under section 137D(7) to specify the consequence of unenforceability.

That last point indicates that, even if I had found in favour of Mr Tchenguiz on the Re-categorisation Issue, his only defence to IG’s debt claim would have been through a counterclaim for damages giving rise to an equitable set-off to extinguish or at least reduce that claim.

I have already mentioned, in Section E above, Mr Mayall’s analysis of the three distinct stages of the formation of the contract between IG and Mr Tchenguiz which led to him (as an EPC) becoming a Select Account customer on 17 December 2019. The effect of this was that Mr Tchenguiz made all his spread bets as an EPC, without NBP, and those made after 17 December 2019 were made with the benefit of the Select Account terms.

It is clear, as I have noted in Section E above in relation to the terms of the ‘Select Account Offer’, that the outcome of those three stages was that the contract between IG and Mr Tchenguiz was contained in the Customer Agreement as supplemented by the Select Account Terms. As also noted above in Section E, none of the spread bets were made by him on the basis that he benefited from NBP, as he made his first only after being categorised as an EPC. To put it another way, the operation of clause 8(12) of the Customer Agreement in relation to his liability upon the closing of a bet, was (at least at the time and prior to this litigation following the closure of his account) not subject to “any Applicable Regulation(s)” in the form of COBS 22.5.17.

Ms Barton KC and Mr Lewis accepted there was a single contract for the purposes of analysing the NBP Defence. As she put in closing submissions:

However, their submission on behalf of Mr Tchenguiz was that the second of Mr Mayall’s three stages – his re-categorisation as an EPC – was part of a statutory process which, if not properly complied with by IG, meant he remained a retail client: the default position under COBS 3.4. In other words, the terms of the single contract (embodied in the Customer Agreement as supplemented by the Select Account terms) are capable of applying to both retail and professional clients but, if the re-categorisation from one to another was not in compliance with the statutory process, then only those applicable to retail clients (materially, NBP) will apply.

On this point of the contractual analysis, before considering the effect of section 138E(2) of FSMA, I have some difficulty in accepting that analysis. If the written terms of the contract had stopped with those in the Customer Agreement the analysis would be more straightforward. As I say, although counsel did not focus upon the phrase “subject to any Applicable Regulations” in clause 8(12) (as set out in Section C above and capable of applying to both retail clients and professional clients) the application of NBP under COBS 22.5.17 to the bet of a retail client dovetails with the opening language of that clause. However, the contract between IG and Mr Tchenguiz extended to the Select Account terms.

In closing submissions, I asked counsel whether the Select Account terms only applied to professional clients, as Mr Ward’s evidence had suggested was the case. Ms Barton KC said it was not clear on their face whether they did or not. Mr Mayall’s instructions were that they were only available to professional clients. I asked the question because, as I put it, some of the Select Account Terms (the Waived Deposit Limit of £250,000 and the Liquidation Level of £0) seemed to be anathema to the protective measures for retail clients (relied upon heavily by Ms Barton and Mr Lewis) first introduced by four of the successive ESMA Decisions, mentioned below, and then reflected in the 2019 Instrument: compare COBS 22.5.11 and 22.5.13 (in relation to margin requirements and margin close out requirements for retail clients). As Mr Mayall responded, the Select Account terms are “completely incompatible with being a retail client”.

On the basis, therefore, that the Select Account terms only applied to professional clients I suggested to Ms Barton KC that, adopting the language of section 138E(2) of FSMA, Mr Tchenguiz’s case must be that those terms are “unenforceable” against him.

Ms Barton KC responded by confirming that Mr Tchenguiz’s case did not involve him saying that the single, entire contract between him and IG was void or unenforceable. Instead, she said where there is tension between the contractual terms and a statute (or in this case COBS as secondary legislation made under FSMA) the statute will prevail.

Ms Barton KC and Mr Lewis submitted that the regulatory changes since 2018 have been such that the protection for retail clients (with accounts for spread betting or other forms of ‘restricted speculative investment’ being covered by the 2019 Instrument) are such that the court can look beyond what Section 138E(2) provides.

They referred me to four ESMA Decisions, made between 1 August 2018 and 1 May 2019 (and each effective for a period of 3 months): ESMA Decision (EU) 2018/796 effective from 1 August; ESMA Decision (EU) 2018/1636 effective from 1 November; ESMA Decision (EU) 2019/155 effective from 1 February; and ESMA decision (EU) 2019/679 effective from 1 May 2019. The Decisions of ESMA are EU Decisions within the meaning of Article 288 of the Treaty of the Functioning of the European Union. This means that they were of direct effect. Article 288 states:

By the time Mr Tchenguiz opened his account with IG the last of the ESMA Decisions had lapsed, on 31 July 2019. Before that date, on 26 April 2019, the FCA issued a Statement in relation to its intended publication of final rules for CFDs and CFD-like options. The FCA referred to its Consultation Paper CP 18/38 and said that, although it had planned to publish the rules in April 2019, it was still considering the feedback so that publication would be in the summer of 2019 and:

As noted in Section D above, the 2019 Instrument introduced COBS 22.5 with effect from 1 August 2019. For the purposes of Mr Tchenguiz’s argument, COBS 22.5 was the relevant legislation by the time he came to open his account with IG.

Nevertheless, his counsel point to the ESMA Decisions, and the regulatory objectives of retail client protection behind those decisions and the 2019 Instrument, to submit, as they did before HHJ Jarman KC on the summary judgment application, that this is a new regulatory regime which (had he succeeded on the Re-categorisation Issue) gave Mr Tchenguiz NBP Defence under COBS 22.5.17, regardless of what Section 138E(2) says.

In my judgment, this argument is flawed.

At a general level, the difficulty with it is that it does amount to saying that the “transactions” which resulted in Mr Tchenguiz being categorised as an EPC, and then being extended the Select Account terms, are unenforceable within the meaning of section 138E(2). Likewise, it involves saying that clause 8(12) of the Customer Agreement cannot be relied upon (i.e. it is unenforceable) without the benefit of NBP. The Re-Amended Defence says he remained a retail client and, on that basis, he denies he owes the sum claimed by IG. Again, as a matter of basic contractual analysis, that can only be on the basis that the terms relied upon by IG are unenforceable.

Although counsel did not seek to present COBS 22.5.17 as an “implied term” of the contract (the express ones being agreed under each of the three stages identified by Mr Mayall) the argument is akin to suggesting that the Customer Agreement is subject to an implied term which directly contradicts what the parties have expressly agreed. Ms Barton KC submitted that statute often supplements or impacts upon what the parties have contractually agreed. She used the analogy of the Landlord and Tenant Act 1954 restricting the landlord’s grounds for recovering possession under a business tenancy. However, that is on the basis that the subject matter of the parties’ agreement can properly be identified as a business tenancy. If what the parties have in fact agreed is that it is a residential tenancy, and the subject matter of their agreement does not point to it being a colourable one, then the 1954 Act simply does not apply.

At the general level, therefore, the problem with the argument is that it produces a result which is directly contrary to what section 138E(2) provides. The essential requirement of a valid contract that its terms should be certain means that it is not generally permissible to carve it up into bits that are binding (and enforceable) and other that are not; or at least not when severing the unenforceable terms produces doubt as to whether what is left is any contract at all. That would seem to be the consequence in this case where all the bets between the parties under the contract (see below) were on the basis that all three stages of contractual agreement were legally effective.

Further, in my judgment, there are flaws in the underlying premise of the argument as well as that apparent in its suggested effect.

Had Mr Tchenguiz succeeded on the Re-categorisation Issue it would have been for contravention of rules (COBS 3.5.3R and COBS 3.5.6R) which are caught by section 138E(1) and (2), not section 138E(3). As explained above, the argument does not get to the stage of “contravention” of COBS 22.5.17R, without a relevant contravention of those other rules which sounds, if at all, only in a claim for damages under section 138D.

As also explained above, there is nothing particularly “new” about COBS 3.5.3R and COBS 3.5.6R so far as distinguishing older authority, by reference to the 2018-2019 ESMA Decisions and the 2019 Instrument, is concerned. Even taking account of the new (post-2018) regulatory regime relied upon by Ms Barton KC and Mr Lewis, these rules are clearly covered by section 138E(2) by reference to their date, source (in terms of the FSA’s/FCA’s general rule-making power) and language (in not mentioning unenforceability).

Not all of the same can be said about COBS 22.5.17R. However, even if Mr Tchenguiz had succeeded on the Re-Categorisation Issue (by establishing a breach of those other rules) I would have been unpersuaded that he would have succeeded in defending IG’s claim without a counterclaim for damages to be set off against it. I say that for two, possibly three, reasons.

The first is that a counterclaim would have been required in respect of the contraventions (of COBS 3.5.3R and COBS 3.5.6R) which are the necessary stepping-stones to any contravention of COBS 22.5.17R.

The second is that CPBS 22.5.17R is not a rule where the FCA has chosen to specify the consequences of a contravention, as section 137D(7) of FSMA says may be done with a product intervention rule. This is quite possibly because COBS 22.5.17R (unlike those other rules) is not expressed in language which easily supports the notion of the firm “contravening” it and instead reads, where it applies, as if it is a statutorily implied term.

The third reason, picking up what I have said above and linked to the second, lies in the difficulty in carving up the Customer Agreement into parts which are enforceable and parts which are not. If that is a good point (and, again, see below in relation to the EPC/Select Account basis on which the bets were in fact made) then it indicates that the proper analysis is that Mr Tchenguiz should have proceeded on the basis that the Customer Agreement (as reached over the three stages) was enforceable but that he had a counterclaim for IG’s breach of COBS 22.5.17R. As Mr Mayall suggested, even a retail client can agree a contractual term which excludes NBP even though he would, under section 138D(2) of FSMA, have a claim for damages amounting to a set-off if the firm relied upon it.

Of course, the contract between IG and Mr Tchenguiz (which is the higher-level “transaction” to which the parties have directed their submissions about sections 138D) was the umbrella agreement for the numerous spread bets placed by Mr Tchenguiz with IG. It is those bets which have resulted in the liability IG seeks to enforce.

The fact that he made those bets (themselves “transactions”) as an EPC, and after 17 December 2019 did so on Select Account terms, is a further indication that his remedy for any wrongful categorisation of him as an EPC should take the form of a counterclaim for damages. Of course, the bets went very badly wrong for him but when he made them he did so on what he perceived and sought to be advantageous terms not available to him as a retail client.

Any such counterclaim, for a breach of COBS 3.5.3R and 3.5.6R would have been subject to the terms of section 138D(2) of FSMA. It would have been for him to establish he had “suffer[ed] loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty”.

The potential defences to a claim for damages for breach of statutory duty include arguments about causation (that the damage was caused both in fact and law by the defendant’s breach of duty) and any contributory negligence on the part of the claimant. I recognise that, had Mr Tchenguiz remained a retail client, then any bets he made with IG (on retail client terms) would have been closed out sooner than was in fact the case by operation of the margin requirements and margin close out requirements for retail clients in COBS 22.5. However, questions as to what those bets would have been in the first place, and whether or not Mr Tchenguiz could or would have wanted to place them instead of those he in fact placed as an EPC, without NBP, would have been matters for investigation and analysis on a counterclaim.

At first sight, the inquiry on that counterclaim would have been considerably less straightforward than him simply claiming against IG the benefit of a ‘stop loss’ based upon NBP.

On the basis that the legal analysis of COBS does not support the novel point of law HHJ Jarman KC was persuaded might exist, by reference to the regulatory changes since 2018, it follows that I see no need to treat the authorities cited to him and me by Mr Mayall with caution. On the contrary, the same authorities cited at both hearings highlight clearly the reason why Mr Tchenguiz’s defence cannot succeed. The answer is given by section 138E(2).

Mr Mayall cited three authorities in support of his submission that, however egregious a firm’s breach of a rule might be, if the rule itself is within the scope of section 138E(2) then any agreement which results from it is not void or unenforceable. He made the same point in relation to the binding terms of any such agreement, however outrageous any particular term (such as one excluding NBP) might be perceived to be. The remedy for any deserving client lay in a claim for damages (if any are proved) under section 138D(2).

IG Index Ltd v Ehrentreu [2013] EWCA Civ 95 concerned a settlement agreement which the defendant, as a client of IG, had entered into to suspend legal action for the recovery of a debt incurred on his spread betting account by agreeing to pay it in instalments. IG had sought summary judgment against him relying on the settlement agreement. That application had been largely successful before the Master and wholly successful on a subsequent appeal to the judge. The defendant had argued that IG were in breach of the customer agreement, also in breach of its regulatory obligations in seeking to enforce the settlement agreement, and, alternatively, that he had a counterclaim for damages which he could set off against his liability to IG. At the time, the provisions now in section 138E(1)-(2) were contained in section 151(1)-(2) of FSMA.

On the defendant’s further appeal, the Court of Appeal dismissed his appeal (saying the settlement agreement excluded the defence of set-off) but recognised he could pursue his counterclaim for damages. In relation to the defendant’s challenge to the enforceability of the settlement agreement, Lewison LJ said, at [46]:

In Marshall v Barclays Bank plc [2015] EWHC 2000 the court was concerned with the enforceability of an interest rate swap which the claimant alleged the bank had “mis-sold” to him. The bank applied for the striking out of the claim, or reverse summary judgment, and the claimant sought to amend his particulars of claim so as to further particularise existing allegations of mis-selling and to add new ones. The draft amended particulars of claim made a specific allegation of a breach of COBS 2. This was another case where the customer had entered into a settlement agreement, itself supplemented by a later agreement when he found he could not meet the payments under the first, in compromise of the bank’s claim under the loan (the interest payable on it having been hedged by the swap).

The court refused permission to amend and struck out the claim. HHJ Judge Stephen Davies said:

Those passages were applied by Phillips J (as he then was) in Marsden v Barclays Bank plc [2016] EWHC 1601. The judge said, at [60], that he was in full agreement with the reasoning of HHJ Stephen Davies. That was another case where the bank applied for summary judgment against, alternatively the striking out of a claim made against it on the basis it had mis-sold two interest rate swaps to the claimant. Again, the circumstances included him having entered into a settlement agreement with the bank in compromise of the bank’s claim under the loan hedged by those agreements. Alongside allegations of deceit and breach of contract, the claimant had sought to impugn the settlement agreement (and the swaps) by reference to what Phillips J summarised (at [57]) as his case on “the Bank’s massive mis-sale of interest rate hedging products [and] acting contrary to the principles, rules and guidance of the regulatory regime.”

The court granted the bank’s application and dismissed the claim. Before citing with approval the above-quoted paragraphs from Marshall, Phillips J said this of the mis-selling argument:

Therefore, to the extent any authority is needed once it is established that the relevant FCA rule is not one outside the scope of section 138E(2) of FSMA, these decisions show that there is no wriggle room for a party to suggest the court may find the consequence of its contravention to be otherwise than as stipulated by statute.

As to that, Mr Mayall cited the decision of the Court of Appeal in Diag Human SE, Josef Stava v Volterra Fietta (a Firm) [2023] EWCA Civ 1107 in an entirely different legislative context. In my judgment, this highlights the difficulty for Mr Tchenguiz in being unable to point to a relevant FCA rule which both as a matter of legislative source (cf. section 138E(3)) and as a matter of language (cf. section 137D(7)(a)) would, if contravened, not be caught by section 138E(2).

The decision in Diag Human concerned the enforceability of a conditional fee agreement. The claimants (or at least one of them) had agreed the CFA with the defendant solicitors. It was unenforceable because it included a success fee which could exceed 100% and it did not state the success fee percentage. It therefore failed to satisfy two of the three conditions specified by section 58 of the Courts and Legal Services Act 1990. Section 58 provided that a CFA which satisfied all of the conditions “shall not be unenforceable; but …. any other conditional fee agreement shall be unenforceable.” The solicitors recognised they could not recover the success fee but submitted the offending success fee could be severed so that they should recover fees for work done at the discounted rate, alternatively be entitled on a quantum meruit.

The Court of Appeal rejected that argument. Stuart-Smith LJ referred to the provisions of section 58 in relation to a “compliant CFA” no longer being regarded as contrary to the common law’s public policy against champertous agreement being enforceable and said, at [21]:

In this case, none of the rules in COBS relied upon by Mr Tchenguiz can be attributed to the FCA exercising its rule-making power in terms which, in specifying the consequences of breach, will firmly discourage other firms from flouting them. Instead, the rules are ones which show that the merits of any particular claim based upon their breach should be dealt with on a case-by-case basis. The facts of the present claim perhaps provide an indication as to why the FCA has decided that should be the position.

In that regard, Mr Mayall also referred to the decision of Flaux J in Bank Leumi (UK) Plc v Wachner (addressed in paragraph 223 above) where, in relation to the client classification rules alleged to have been contravened in that case, he said:

In that case, the client had brought a counterclaim for damages, which in the event was unsuccessful, and the focus was therefore upon whether or not the relevant rules in COB supported a claim for damages under what is now section 138D of FSMA. For present purposes, that authority does not assist much beyond me being able to say that there is nothing surprising about COBS 3.5.3R and 3.5.6R falling within the scope of section 138D(2) and section 138E(2) of FSMA, but not section 138E(3).

All of these cases demonstrate that section 138D(2) and 138E(2) and (3) mean what they say. Whether or not their application points to the client of a firm having an absolute defence to the firm’s contractual claim or, instead, a counterclaim for damages (which might provide a defence of set-off, either full or pro tanto) will depend upon the correct categorisation of the rule(s) shown to have been contravened.

The short answer to Mr Tchenguiz’s case on the NBP Defence, indeed his defence generally in the absence of a counterclaim, is that he is unable to point to a rule in COBS which is not caught by section 138E(2).

IG therefore succeeds on its claim against Mr Tchenguiz. He is liable to IG under clauses 8 and 16(4) of the Customer Agreement.

This judgment will be handed down remotely by email to the parties’ legal representatives and uploading to The National Archives. The handing down will be adjourned for the purpose of preserving the time for filing any appellant’s notice and, if permission to appeal is sought from me, I will make a direction in relation to the filing of any such notice under CPR 52.12 in my order reflecting this judgment. The terms of that order will reflect such matters as the parties are able to agree in the light of the judgment and any remaining matters which fall to be determined in the absence of agreement. In the first instance, I encourage the parties to agree the terms of the order which reflect what I have decided.