CA-2024-001533 - [2025] EWCA Civ 1369

Background

At all material times, Linear was (and remains) a specialist investment firm which was (and is) regulated under the Financial Services and Markets Act 2000 (“FSMA”). At the time of his application to become a client of Linear, Professor Willcocks had been employed at the London School of Economics (the “LSE”) for about 12 years and was an emeritus professor specialising in robotic automation.

In August 2017, Professor Willcocks was introduced to Linear by email by a friend who was the father of one of Linear’s wealth managers. At the time, Linear was marketing its Pembroke strategy, which it described as a managed investment account strategy based upon a computer-driven trading system developed by a third party which was named “Apollo”.

On 11 September 2017, the wealth manager at Linear emailed Professor Willcocks a factsheet for the Pembroke strategy for September 2017 (the “Factsheet”). The Factsheet stated prominently at its top under the heading “Key Information” that its “Target Client” was “Professional & Institutional Investors. High Growth. Medium Risk”, that its “Focus” was on “Euro Stoxx 600 (Footnote: ¹) Equity & Derivative” and that its “Investment Process” was “Fundamental & Technical Analysis – Computer Driven”. The Factsheet also stated that the Pembroke strategy was run as an “equal-weighted portfolio of best trades, rather than requiring a hedging system”, with “between 25-35 open positions [being] run long/short”, with an average holding time of two calendar months. It specified a minimum subscription of £100,000.

A disclaimer at the end of the Factsheet stated that,

“The Managed Long Term Equity strategy is intended for eligible counterparties and professional investors only. The strategy is a high risk investment and investors considering the strategy should only invest in the strategy if they are comfortable losing all or part of their original invested capital. Investors could lose more than their initial investment.”

On 5 December 2017, Professor Willcocks completed and signed a number of documents in order to invest in the Pembroke strategy. The first document was an Account Opening Form provided by Linear. At the top of the document it stated,

“All sections of this Account Opening Form must be completed in order for Linear to assess your suitability to open an account. It is essential that the information provided is accurate and if, at a future date, any circumstances affect this information you are required to write to us advising us of these details.”

On the Account Opening Form, Professor Willcocks stated that he had been employed by the LSE in the education business for 12 years. He gave his approximate net worth as £2.2 million and the approximate value of his investment portfolio as £800,000. He also put a cross in the “Yes” box in answer to the question “Do you understand that only risk capital should be invested?”.

Under the heading “Investment Experience” there were a series of boxes into which Professor Willcocks inserted crosses to indicate whether he had traded various types of investments. The first set of boxes related to trading in equities. Professor Willcocks inserted crosses in the boxes to indicate that he had traded in equities on an execution only and advisory basis for over two years, with a frequency of 40-80 transactions a year, and with an average transaction size of in excess of £25,000.

The second set of boxes related to trading in CFDs. Professor Willcocks inserted crosses to indicate that he had traded CFDs on an execution only and advisory basis for over two years, and with 40-80 transactions a year. Professor Willcocks also put a cross in the box to indicate that his trading in CFDs had been with an average transaction size of “20+” lots per transaction. This was the largest option on the form, which gave as alternatives, 1-5, 6-20 and 20+ lots per transaction.

Professor Willcocks also put crosses in further boxes to indicate that he had invested in Alternative Investments/Funds on an execution only and advisory basis, but that he had not traded in options, futures or foreign exchange (FX).

The boxes referred to above were then followed by a section of the form headed “Market Knowledge and Individual Objectives”. Importantly for present purposes, the first box stated,

“Briefly explain your experience and knowledge in relation to the transactions that the account manager plans to execute via Linear Investments Limited.”

Professor Willcocks’ answer was,

“Have invested for +15 years in blue chip stocks.”

At the end of the Account Opening Form, and above the place for Professor Willcocks’ signature, there was an Account Opening Declaration that read,

“I confirm that the information provided to Linear Investments Limited in this Account Opening Form is true and accurate and may be relied upon by Linear Investments Limited in assessing whether I meet the detailed requirements to be treated as a Professional Client.”

Professor Willcocks also completed and signed Appendix B to the Account Opening Form. That explained that he could request to be an “elective professional client” if he satisfied what were described as the “qualitative test” and the “quantitative test”. Those terms are to be found in the provisions of COBS 3.5R which are central to this case.

As in force at the relevant time at the end of 2017, COBS 3.5.1R provided that a professional client would be either a per se professional client as defined by COBS 3.5.2R (e.g. a regulated financial institution or investment firm) or an elective professional client as defined by COBS 3.5.3R. That rule provided,

“A firm may treat a client as an elective professional client if it complies with (1) and (3) and, where applicable, (2):

the firm undertakes an adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved (the “qualitative test”);

in relation to MiFID or equivalent third country business in the course of that assessment, at least two of the following criteria are satisfied:

the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

the size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;

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;

(the “quantitative test”); and

the following procedure is followed:

the client must state in writing to the firm that it wishes to be treated as a professional client either generally or in respect of a particular service or transaction or type of transaction or product;

the firm must give the client a clear written warning of the protections and investor compensation rights the client may lose; and

the client must state in writing, in a separate document from the contract, that it is aware of the consequences of losing such protections.”

As envisaged by COBS 3.5.3(3)(b), Appendix B to the Account Opening Form set out the protections in the FCA rules for retail clients that would not apply to elective professional clients.

Appendix B ended with a section headed “Elective Professional Declaration” which Professor Willcocks signed to request that he wished to be classified as an elective professional client, and that he was aware that being treated as an elective professional client would afford him less investor protection than being treated as a retail client. At the end of that Declaration and below the place for signature, the form stated in bold type, “Please ensure to attach appropriate evidence to support categorisation”. Professor Willcocks did not attach any documents to the form.

At the same time as completing the Account Opening Form, Professor Willcocks also completed a client application form for SAXO in connection with the Pembroke strategy (the “SAXO Form”). SAXO was a broker which held Professor Willcocks’ funds and positions and Professor Willcocks gave Linear a power of attorney to manage his account with SAXO.

On the SAXO Form, Professor Willcocks put a cross in boxes to indicate that he had continuously traded financial products on an execution-only basis for more than 5 years. He also put a cross in a box to indicate that he had worked in the financial sector for at least one year in a professional position which required knowledge of the nature and risk of the type of trading that he intended to carry out. In that respect, he filled in numbers by hand to indicate that he had carried out 40-80 trades on an execution-only basis in the last 12 months in each of shares, gilts and bonds, and CFDs.

Finally, on 5 December 2017, Professor Willcocks executed a Managed Discretionary Advisory Agreement (“MDAA”) with Linear. That MDAA included specific terms dealing with the management of Professor Willcocks’ account in accordance with a number of different strategies including the Pembroke strategy. In the section headed “Specific Terms” it stated,

“The portfolio will be designed with the objective of producing long term capital growth. The portfolio may be invested in multiple strategies or just one depending on your investment requirement. Active management will be used to capitalise on short term opportunities with varying levels of holding time across strategies, Pembroke and Trinity are both equity focused. Wolfson is focused on Equity Indices.

Pembroke will hold stocks on an equal weighted basis across typically 35 positions with an average investment horizon of 40 trading days leverage up to 2x will be optional.

…

Derivatives will be used to enhance growth as well as balance the investment portfolio providing flexibility to take on short positions. We may look to hedge the stock strategies trading indices if we feel it will help to mitigate risk.”