FOS vanquished in battle of the scalper robots
In judicial review proceedings brought in November 2020, an online FX trading platform provider successfully challenged a final decision issued by the FOS. HHJ Karen Walden-Smith found that the FOS had erred in giving the words of the terms and conditions governing the parties’ relationship a literal meaning, rather than considering the context and the contract as a whole. As such, the judge determined that the FOS had erred in deciding that, on the balance of probabilities, the Interested Parties had not been taking advantage of price latency arbitrage.
Background
In November 2017, TF Global Markets (UK) Limited (TF), an online investment platform, sought to rely on its contractual trading terms to suspend 30 accounts, including suspending the accounts of three individuals (the Interested Parties), and withholding their profits. TF suspected that the Interested Parties had used algorithms/robots to identify lags in prices being displayed on TF’s platform and the market and had taken advantage of price latency, or had been engaged in market manipulation, to generate profit. Although the practice of price latency and arbitrage is not unlawful in the UK, it is regarded by many as being unfair. TF had prepared its terms and conditions so as to protect itself from unfair activities.
Clause 7.8 provided:
“We reserve the right to refuse any trades placed by you that we judge to be clearly outside the prevailing market price such that they may be deemed non-market price Transactions, whether due to manifest error or stale, incorrect or broken price feeds. Where we have opened or closed a trade before becoming aware of the price disparity, we may at our absolute discretion either treat that trade as void ….”
Clause 7.10 provided:
“…ThinkMarkets does not permit the practice of arbitrage, nor does it allow Client to take advantage of price latency. Transactions that rely on price latency or arbitrage opportunities may be revoked at our discretion.”
Clause 18 set out various client warranties, including that:
“18.2.2 (a) You will not place and have not placed a Transaction with ThinkMarkets or otherwise behaved, nor will you behave in a manner that would amount to market abuse and/or market manipulation by you (or by you acting jointly or in collusion with other persons).”
Complaint to the FOS
The Interested Parties each complained initially to TF, which considered and rejected those complaints, based on the proper construction of the contractual terms with its clients. The Interested Parties then complained to the FOS over TF’s decision to suspend their accounts and withhold profits on those accounts. The determination of the complaints followed the FOS’s iterative process, with the complaints being referred to an ombudsman for final decision as the Interested Parties did not agree with the adjudicator’s initial assessment of their complaints (being to agree with TF and reject them).
The ombudsman considered and then upheld the complaints, finding that it was no more than a possibility that the individuals had conducted abusive trading, applying the balance of probabilities test. It ordered that the profits of each of the Interested Parties should be released, together with interest and compensation of £250. The Interested Parties accepted the ombudsman’s determination.
Judicial review
Once an ombudsman’s final decision is accepted, it is binding on all parties and cannot be appealed, except to bring a challenge by way of judicial review on the grounds of some error of law or procedural impropriety relating to the manner in which the decision was reached. Given the latitude afforded to the FOS in its decision-making process and its ability to interpret evidence widely, instances of judicial review of FOS decisions are very rare indeed.
TF was, however, successful in obtaining permission from the court to bring judicial review proceedings challenging the FOS’s final decision. The judicial review challenge rested on the correct construction of TF’s terms and conditions (clauses 7.8, 7.10 and 18), which governed the relationship between TF and the Interested Parties, and whether the FOS had erred in its interpretation of those clauses.
The FOS sought to argue that:
- TF had only relied on (and could only rely on) clause 7.10 to suspend the accounts and withhold profits.
- The wording of clause 7.10 stated “Transactions that [emphasis added] rely on price latency or arbitrage opportunities may be revoked at our discretion.” It was the ombudsman’s position that the word “that” required TF to demonstrate that they were satisfied, on the balance of probabilities, that the Interested Parties had taken advantage of price latency or arbitrage. It was not sufficient to show that TF had a reasonable suspicion that there may have been reliance on price latency or arbitrage by the Interested Parties, and therefore TF was not permitted to suspend accounts and withhold profits on the basis of clause 7.10.
Decision
The court held that the ombudsman had erred in finding that the Interested Parties had not been trading by taking advantage of price latency or being engaged in arbitrage, and quashed the FOS’s final decision letters.
In particular, the court held that:
- The leading authority in relation to the interpretation of contracts is the speech of Lord Hodge JSC in Wood v. Capita Insurance Services Limited [2017] UKSC 24, in which he set out:
“The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract give more or less weight to elements of the wider context in reaching its view as to that objective meaning.”
- The ombudsman erred in its construction of clause 7.10 in that it gave the words of the clause a literal meaning, rather than reading the clause in the context of the entire contract. To limit TF’s ability to prohibit such trading by reason of a literal interpretation of the word “that” and elevating the importance of that one word went against the principles of the interpretation of contracts. HHJ Karen Walden-Smith stated that clause 7.10 envisaged that TF had a discretionary right to intervene if there was a suspicion of trading that involved price latency or arbitrage, and such an interpretation was in keeping with the drafting of the rest of the contract and the regular use of discretionary wording throughout.
- The ombudsman failed to analyse clause 7.8, and there was no apparent reason for it failing to do so. Whilst clause 7.10 was more specifically directed towards the facts of the case, this did not prohibit TF from also being able to rely on clause 7.8 to refuse trades for price latency. Clauses 7.8 and 7.10 could be distinguished from each other.
- The ombudsman failed to appreciate that, by way of clause 18.2.2, each of the Interested Parties had provided a warranty to TF that it would not behave in a manner amounting to market manipulation, and had erred in finding that TF was not entitled to rely on this warranty.
Conclusions – What does it mean for you?
This case highlights the importance of strong, clear contractual terms that are cogent, both when read in isolation, and when read as a whole in the context of the other terms of the contract. Any lack of coherency leads to confusion, which can often lead to legal and regulatory risk.
The case clearly demonstrates that a firm should not feel compelled to accept a FOS determination when it considers that decision is wrong. The FOS process is asymmetrical, in that there is no obligatory cost to the complainer, and no costs consequence in the event a complaint is made and ultimately rejected by the FOS. Firms are respondents throughout the process and must conduct themselves in line with regulatory expectations in the FOS forum.
The outcome of a FOS determination is public and may impact a firm’s reputation. Although judicial review proceedings of FOS decisions are relatively rare due to the limited grounds available and high threshold test to be met, this does not mean that the option of judicial review should be dismissed when a final decision has been issued.
It is clear that in appropriate cases, where a firm believes it is on strong ground, it may be worth challenging a FOS decision through judicial review proceedings.
Client Alert 2020-617
