In an important ruling which significantly extends the armoury of financial regulators, the High Court has ruled that the Financial Ombudsman Service (FOS) had power to adjudicate upon an investor’s complaint that his foreign exchange (forex) trading account was mismanaged by a City firm.
The investor had complained to the FOS after he sustained a loss of more than £10,000 upon the closure of his account. The FOS accepted jurisdiction to consider the matter on the basis that the operation of the forex account was an investment activity subject to regulation under the Financial Services and Markets Act 2000 (the FSMA).
The firm sought judicial review of that decision, claiming that the role it performed for its client in managing the account was unregulated in that it did not involve dealing in any investments of the kind specified in article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO).
It was also submitted that the relevant activity was excluded from regulation under article 85(2)(a) of the RAO in that the intention of the contracting parties was that profits would be generated, or losses avoided, by the client ‘taking delivery’ of the foreign currency to which the contract related.
Dismissing the firm’s challenge, however, the High Court found that, on a correct interpretation of the contract, the firm had provided more to its client than merely an execution-only dealing service and that the purpose of the account was to secure profit, or avoid loss, by reference to fluctuations in the value of currencies. The Court rejected the firm’s plea that it had acted at all times solely as its client’s agent and that the account was merely a vehicle for trading carried out on his behalf.
Although the amounts of currency traded appeared as credits and debits on the client’s account, the Court noted that he had no entitlement to withdraw funds nor was he required to cover the amount of any debit. In those circumstances, it would be irrational to view the currency as having been ‘delivered’ to the client.
The Court concluded that, on a correct interpretation of the RAO, when positions on the forex account were opened and closed, the client acquired rights under contracts which fell within article 85(1) and which were not excluded from regulation by article 85(2)(a). It followed that the FSO had jurisdiction to consider the client’s complaint under section 266 of the FSMA.