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The Court of Appeal has partially dismissed a judicial review claim by an investment firm against a decision by the Financial Ombudsman Service (FOS) that the firm had wrongly classified a former client as an elective professional client: Linear Investments Ltd v Financial Ombudsman Service Ltd [2025] EWCA Civ 1369.
By way of refresher, under the Financial Conduct Authority's (FCA) Conduct of Business Rules (COBS), in particular COBS 3.5.3R, a firm may classify a client as an elective professional client subject to meeting certain requirements. The rule imposes three conditions: (i) the qualitative test, requiring an adequate assessment of the client's expertise, experience and knowledge to give reasonable assurance that they can make their own investment decisions and understand the risks; (ii) the quantitative test, requiring the client to meet at least two specified criteria (such as sufficient trading history, portfolio size, or relevant professional experience); and (iii) procedural safeguards, including written requests, warnings about lost protections, and client acknowledgment of those consequences.
The decision will be of interest to financial institutions as it illustrates that whether a firm has complied with COBS 3.5.3R is a matter of regulatory compliance rather than a matter of private contract. It emphasises that in a situation where a regulated entity has formulated questions for a client to answer about their financial experience and knowledge, it is under a positive duty to carefully review any representations by the client and where any are unclear or incomplete to make further inquiries. The decision is a timely reminder for financial institutions, particularly in light of the FCA's current consultation in which it proposes to update its rules on client categorisation for elective professional clients (see our blog post), of the importance of firms adhering to regulatory requirements when classifying clients as elective professional clients. It illustrates the importance of designing documentation and processes which are fit for meeting regulatory requirements and following those processes in practice.
The decision highlights that relying solely on tick-box answers without obtaining supporting evidence or clarifying inconsistencies will be insufficient to meet the qualitative or quantitative tests in COBS 3.5.3R (an area for improvement recently highlighted by the FCA following a multi-firm review – see our blog post). Consequently, this leads to a risk of a firm incorrectly categorising a client as an elective professional client and breaching regulatory requirements. That said, the decision gives some comfort that the common law of contributory negligence may mitigate that risk, particularly where the client's inaccurate representations about their financial experience and knowledge were operative causes of making high-risk investments and resulting losses.
We consider the decision in more detail below.
Background
In August 2017, the client was introduced to the claimant firm. At the time, the firm was marketing its computer-driven "Pembroke" trading strategy, which involved leveraged trading in derivatives, including contracts for differences (CFDs), aimed at professional and institutional investors. To access the strategy, the client completed account opening documentation (including tick-box forms and brief handwritten notes) and requested the firm treat him as an elective professional client under COBS. In doing so, he represented that he had extensive experience trading equities, bonds and CFDs. He also signed a declaration confirming he was aware that being treated as an elective professional client would afford him less investor protection than if he were treated as a retail client. On the basis of these documents, the firm accepted him as an elective professional client.
In January 2018, the client invested £100,000 and granted the firm authority to manage his account under the Pembroke strategy. Over the following year, the firm executed frequent CFD trades, resulting in significant losses. The client terminated the arrangement in February 2019 and submitted a complaint to the firm, alleging misstatement of fee and performance information and mismanagement. He did not complain that the firm wrongly accepted him as an elective professional client. The firm rejected the complaint.
The client then referred the matter to the FOS. Again, he did not complain that he had been wrongly accepted as an elective professional client. The FOS upheld the complaint, finding that the firm had not carried out an adequate assessment of the client's expertise, experience and knowledge as required by the qualitative test under COBS 3.5.3R(1). The FOS also found that it was not satisfied that the client met the quantitative test under COBS 3.5.3(2) based on the information the firm obtained. It concluded that the firm misclassified the client, gave him misleading information, and mismanaged his account. The FOS initially proposed that the client should bear 25% of his losses because he provided incorrect information in his account opening documents. However, in a revised provisional decision – later confirmed in the final determination – the FOS concluded that firm was fully responsible for the losses. Accordingly, the FOS awarded the client full compensation based on a medium-risk FTSE index benchmark plus interest, without deducting for contributory negligence. The firm sought judicial review.
High Court decision
The High Court dismissed the claim.
The High Court found that the FOS had acted within its broad remit in examining whether the firm had correctly classified the client as an elective professional client. The High Court said that the FOS was entitled to assess the firm's compliance with 3.5.3R, not merely to review the firm's decision for irrationality, and agreed with the FOS's conclusion that the firm had failed to conduct an adequate assessment. The High Court also upheld the FOS's choice of benchmark for calculating redress, finding it rational and consistent with the Financial Services and Markets Act 2000. Lastly, the High Court rejected the firm's arguments on contributory negligence, noting that the FOS had addressed the issue fully and was not required to apply common law principles.
The firm appealed.
Court of Appeal decision
The Court of Appeal partially dismissed the firm's appeal.
The key aspects of the decision which will be of interest to financial institutions are set out below.
Classification
The firm argued that the client's representations as to his trading experience in CFDs gave the firm the "reasonable assurance" necessary to satisfy both the qualitative and quantitative tests under COBS 3.5.3R and there was no obligation on the firm to request any further documentation or make any further inquiry.
The Court of Appeal rejected this ground, underlining that the question of whether the firm had complied with COBS 3.5.3R was a matter of regulatory compliance rather than a matter of private contract. The representations in the account opening documents on which the firm relied were not express terms of the contract between it and the client. Also, as per Steria v Hutchinson [2006] EWCA Civ 1551, for there be to be an estoppel by representation, the representation must be clear and the representee's reliance on it must be reasonable. Thus, if the representation is unclear or incomplete, or there are circumstances which suggest that it may not be accurate and call for further clarification or inquiry, the representee cannot hold the representor to it. These considerations are more relevant in a situation in which the representor and representee are not simply private parties dealing on an equal footing, but where the representee is a regulated entity which is under a positive duty to make a careful assessment of matters to which the representation relates, and has formulated the questions for the representor to answer.
The Court of Appeal also accepted that in carrying out its qualitative assessment under COBS 3.5.3(1)R, the firm was entitled to start from an assumption that the client was an intelligent individual capable of understanding the account opening documents and that he would provide truthful and accurate answers. However, it considered that for a firm simply to require a client to complete a few general tick boxes containing bald statements in relation to their trading experience and do nothing more was unlikely to be enough to satisfy COBS 3.5.3(1)R.
In the present case, in the Court of Appeal's view, the client's answer that he had invested previously in "blue chip stocks" but not said anything about his experience of trading CFDs was a glaring omission. It called into the question whether he understood the difference between the two activities and whether his tick box answers concerning trading in CFDs were accurate. Further, the client's failure to attach any evidence of trading in CFDs to the form compounded that omission. The Court of Appeal agreed with the FOS that the circumstances required the firm to make further inquiries and prevented it from simply relying on the tick box answers that the client gave. The FOS's conclusion that the firm's failure to pursue any further inquiries meant that it did not satisfy the qualitative test in COBS 3.5.3R(1) was, in the Court of Appeal's view, entirely justifiable.
Although it did not receive detailed submissions from the firm as to the FOS' finding that the firm had failed to meet the quantitative test, the Court of Appeal added that it would have rejected any appeal on this issue. It noted that the wording of the quantitative test in COBS 3.5.3R(2) is not clear, but the Court of Appeal assumed in the firm's favour that a firm may satisfy the test by carrying out an adequate assessment of whether two of the three criteria are satisfied, even if its conclusion is objectively right or not. However, in the present case, the Court of Appeal underlined that it did not regard the firm's assessment based upon the account opening documents as adequate. The tick box options in relation to the number of lots per transactions in CFDs did not require the client to specify which market they had previously traded on or lot size, making it impossible to relate the client's claimed experience to the proposed CFD transactions. Nor did the client provide supporting evidence or clarification. Similarly, the client's indication of prior financial sector employment lacked detail and raised obvious questions about whether any experience was current or relevant. The firm failed to pursue those points.
Benchmark
The firm also asserted that even if it had wrongly classified the client as an elective professional client, it was irrational for the FOS to award him damages by reference to a medium-risk index in circumstances where the client had voluntarily applied to invest in a higher risk strategy.
The Court of Appeal rejected this ground, highlighting that since the firm had not properly assessed whether the client could understand the high risks involved in investing in its Pembroke strategy, it would be illogical to base any compensation for that default upon an assumption that the client was capable of understanding those higher risks. That had never been established. In the Court of Appeal's view, the FOS was not acting irrationally in choosing a benchmark which did not reflect the Pembroke strategy, but in essence treated the client as a "medium risk" investor.
Contributory negligence
The firm also argued that it was both wrong and irrational for the FOS not to reduce the client's award by reason of his own fault in making inaccurate statements as to his experience of trading in CFDs. It contended that even if it made other errors in dealing with the client, those misrepresentations were causative of his losses because they induced the firm to enter into the relationship with him in the first place. This was plainly a case of contributory fault falling within the Law Reform (Contributory Negligence) Act 1945.
The Court of Appeal noted that the FOS's reason for not making any reduction in the award to reflect the client's provision of inaccurate information in the account opening documentation was essentially that, in addition to mis-classifying the client, the firm also gave unclear and misleading information as regards the risk and costs of using the Pembroke service. The FOS reasoned that but for those other failings the client would not have invested in the Pembroke strategy in any event.
The Court of Appeal disagreed with the FOS's conclusion that the client's misrepresentations were not causative of his losses. It said that his inaccurate statements about CFD experience and financial sector employment were operative causes of him making the investments and resulting losses. In the Court of Appeal's judgment, the FOS had misapplied the law on contributory negligence and failed to explain its departure from it. The Court of Appeal reasoned that if the client had made accurate statements about his lack of experience of trading CFDs and of working in the financial sector, he would not have been accepted as an elective professional client and therefore would not have been able to follow the investment strategy he had. As a matter of law, it does not matter whether the fault of the claimant occurs prior or subsequent to the wrongdoing of the defendant; what matters is that some fault of the claimant is also causative of the loss incurred. Although the FOS was not obliged to apply the law in this respect, it was obliged by 3.6.4R of the FCA's Dispute Resolution Complaints Sourcebook (DISP) to take it into account and, if departing in doing so, to explain why. Accordingly, the Court of Appeal remitted the matter to the FOS to reassess the award, taking into account the client's contributory fault.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
