High Court Considers Application Of COBS And Braganza Duty To Close Out Of Trading Account

• Published date: 12 August 2022
• Subject Matter: Finance and Banking, Media, Telecoms, IT, Entertainment, Financial Services, Gaming
• Law Firm: Herbert Smith Freehills
• Author: Ms Ceri Morgan and Gayatri Gogoi

The High Court found in favour of an online spread betting company in a claim for '1.3 million in unpaid debts against a real estate tycoon following the close-out of a trading position on an online spread betting platform in March 2020: CMC Spreadbet plc v Tchenguiz [2022] EWHC 1640 (Comm).

The decision will be of interest to financial services providers in relation the nature of obligations under the Financial Conduct Authority's Conduct of Business Sourcebook (COBS) Rules, including in relation to the duty to act in the best interests of a client when closing out a trading account which has a negative balance. The case is also a helpful example of how the court will grapple with whether a contractual discretion to close out has been exercised in a manner that is reasonable and not irrational, arbitrary or capricious, in accordance with the Supreme Court's decision in Braganza v BP Shipping Ltd [2015] UKSC 17.

Spread betting is a form of contract for differences, in which investors speculate about the price movement of financial markets (for example) without owning any underlying asset. In the present case, the defendant had elected to be treated as a professional client when opening his spread betting account with the claimant spread betting firm. The court found that the claimant had rightly treated the defendant as a professional client and that he had waived the rights given to retail investors. As such, the claimant firm had not failed to comply with its COBS obligations to warn the defendant about the loss of protection as a retail investor.

The court also held that the claimant's decision to close out the account, which had accrued a significant negative balance, had not breached the implied Braganza duty to act rationally and in good faith, nor had it breached the COBS rule to act in the client's best interests.

We consider the decision in more detail below.

Background

Mr Tchenguiz opened a spread betting account in 2019 with the claimant, CMC Spreadbet plc (CMC). While the account opened by CMC for Mr Tchenguiz was initially on retail terms, Mr Tchenguiz completed a request form to elect to be treated as a "professional client". At the time, Mr Tchenguiz also held positions with a number of spread betting firms as an elective professional client. The request form notified Mr Tchenguiz of the protections he would lose by his reclassification.

His classification as a professional client allowed Mr Tchenguiz to being able to trade on a high...