Rocker v. Full Circle Asset Management Ltd [2017] EWHC 2999 (QB)

In this interesting and detailed judgment, Mr Justice Morris (the Judge) considered the claims of Mr Rocker, a successful businessman, against Full Circle Asset Management Limited (FCAM) for breach of contract, breach of statutory duty and negligence. FCAM provided discretionary fund management (DFM) services and this judgment will be of interest to both providers and users of DFM services and anyone who is required to assess compensation claims relating to DFM portfolios. Mr Rocker partially succeeded in his claim, in that the Judge found he was entitled to damages for the periods when his portfolio had a risk score in excess of his agreed risk profile and also for all losses incurred where a promised stop loss policy should have operated to prevent them. However, DFM providers will take some comfort from the dismissal of Mr Rocker's claim that his portfolio should have reflected the asset allocation of the reference benchmark and his attempt to recover the profits he would otherwise have made on his investment, but for FCAM's breaches.

Key takeaway points:

  • undertaking and then documenting a proper assessment of a client's attitude to risk is an important regulatory requirement, but can in some instances also act to protect a firm against a breach of mandate claim.
  • Reference in documentation to a performance benchmark is merely a means by which to assess performance. It does not require a DFM provider to ensure that its portfolio has similar asset allocation to that benchmark nor does it act as a guarantee of performance in line with that benchmark.
  • Investment managers should review how any "stop loss" mechanism is described in customer terms and how the mechanism is operated in practice. Absent explanations to the contrary, references in documentation to "stop loss" protection mean a system whereby an investment would be (nearly) automatically sold if its value goes below a particular threshold; DFM providers that deploy "stop loss" protection as a trigger for portfolio review rather than for investment sale need to revisit this practice and their documentation.
  • The court is content to take a rough and ready approach to quantifying damages where, as here, it would be extremely time-consuming and uncertain to assess what would have been the position were it not for the defendant's breach and that uncertainty arises because of actions of the defendant.

The facts

Mr Rocker's claim arose in respect of FCAM's management of his £1.5 million investment into its discretionary managed Inner Circle portfolio in 2009 (the IC Portfolio). By the time he removed it in 2014 the capital value had more than halved. Mr Rocker's claim was for both his capital loss and the amount by which he contended his investment would have appreciated had FCAM adhered to its instructions.

In particular Mr Rocker alleged that:

  1. FCAM invested significant portions of the £1.5 million in high-risk investments, which took the overall risk of the portfolio above the agreed risk limits; and
  2. the reference to an APCIMS benchmark required FCAM to adopt equivalent asset allocation in the IC Portfolio or achieve equivalent returns; and
  3. FCAM failed to operate a "stop loss" policy that would have limited losses.

FCAM's defence was based on having agreed with Mr Rocker a "bear" strategy for the IC Portfolio and agreed a "medium but flexible" risk profile. It was contended that:

  1. the portfolio did not exceed that risk profile;
  2. the benchmark was simply a means by which to assess performance; and
  3. there was no obligation to operate a stop loss policy and in any event this was not breached.

Breach of mandate

The key issue for the Judge was whether the actual overall portfolio risk for Mr Rocker's IC Portfolio exceeded the agreed portfolio risk profile. This turned in particular on (i) what was the agreed risk profile; and (ii) what was the risk profile of the IC Portfolio from time to time.

In respect of the former, it is relevant that, following recommendations in an s.166 report, in June 2012 FCAM conducted a detailed suitability assessment of its customers and "re-papered" Mr Rocker. In the period up to June 2012 Mr Rocker's risk profile was "medium" and the portfolio risk profile of the IC Portfolio was also "medium" (noting that, as a result of a prior ruling, FCAM was precluded from arguing to the contrary). When he was "re-papered", however, Mr Rocker was categorised as "medium high" risk. This was ultimately helpful to FCAM in this claim as from that point onward it was accepted there had been no breach of mandate.

In respect of the latter point, in determining the risk profile of the portfolio the IC Portfolio was "risk scored" by ascribing numerical values to the risk involved in particular assets and to the portfolio as a whole. The Judge was clear that this process is not an exact science and open to a range of views but that, provided FCAM's risk scores were within such range, then they would be appropriate, which they were.

The risk scoring resulted in the finding that, from 2009 to June 2012, the risk profile of the IC Portfolio exceeded the agreed portfolio risk profile on nine occasions and, where this occurred, FCAM acted in breach of mandate, in breach of its agreement with Mr Rocker and/or suitability requirements under COBS 9.3.1G. Accordingly he was entitled to damages for losses arising as a result of these breaches.

The IC Portfolio agreement provided for a benchmark against which to measure performance. Initially this was base rate and subsequently changed to the APCIMS Balanced Portfolio Index. Mr Rocker argued that it was implicit from this that FCAM would adhere to the asset allocation in that benchmark and that failure to do so resulted in losses in breach of contract and COBS 6.1.6.

The Judge swiftly dismissed this claim for several reasons:

  1. First, it was clear from the wording of Mr Rocker's agreement with FCAM (which included the language "our aim is to out-perform") that the purpose of the benchmark referred to was for it to be used as a performance measure not as a guarantee of a certain level of performance or asset allocation.
  2. Secondly, the language of COBS 6.1.6 overall supports the benchmark being a measure of performance. COBS 6.1.6 is clearly concerned with measures enabling a client to assess a firm's performance; it does not prescribe the allocation of assets within a portfolio.
  3. Thirdly, this conclusion was supported by the fact that the performance benchmark initially was base rate and even Mr Rocker's expert accepted that this did not require FCAM to put all of his investment in cash, which undermined the overall argument.
  4. Fourthly, the IC Portfolio adopted a fairly unorthodox "bear" strategy, which had been specifically agreed with Mr Rocker; requiring investment in line with the more traditional APCIMS benchmark would have been quite inconsistent with that strategy and therefore further reason why Mr Rocker's interpretation was not correct.

Therefore, FCAM was not to have breached its obligations under the IC agreements and/or COBS in relation to the performance benchmark.

The "stop loss" dispute centred on (i) whether FCAM was under any legal obligation to operate a "stop loss" protection system; and (ii) if so, what the content of that obligation was.

In relation to (i), FCAM made promises in respect of operating a "stop loss" system in its suitability letter and orally in meetings. The Judge found that the suitability letter was a contractual document and contained a promise or obligation that FCAM would provide "stop loss" protection, which would reduce the risk of excessive damage to the portfolio. Alternatively, in the other instances in which the statements about the stop loss protection were made, those statements were made with the intention that they have contractual force and were terms of the agreement between Mr Rocker and FCAM. The Judge was clear that had he not found a contractual term he would not have implied such a term into the agreement since a "stop loss" provision was not necessary to give the agreement business efficacy, nor so obvious that it went without saying (a point reinforced by the parties' own disputes as to what such a term actually meant).

As regards (ii), Mr Rocker's case was essentially that "stop loss" protection meant that, once the value of an investment decreased to trigger the specified stop loss level, this would result in a near-automatic sale of the investment to prevent further losses.

FCAM's position was that "stop loss" is an investment management tool used to monitor investment value and act as an alert for the portfolio manager to review the investment and actively consider whether to sell or continue to hold it. It did not connote an automatic sale.

The Judge agreed with Mr Rocker. The judgment provides a helpful exposition of the case law and other materials on this issue. "Stop loss" when used in connection with investment practices indicates a procedure which leads to automatic or semi-automatic sale of an investment. This interpretation was supported by the natural meaning of the words and the dictionary definitions and was also consistent with associated case law. There was insufficient evidence that this meaning was displaced and superseded by a discretionary alert procedure such as FCAM in fact operated.

It followed from these findings that the discretionary approach FCAM argued for and claimed to have operated was in breach of the "stop loss" term in any case where the investment fell by more than a particular percentage (in this case 5 per cent) and was not sold as soon as it reached that point.

The judgment in relation to the alleged COBS breaches is interesting in so far as it considers the application of the COBS 9 suitability requirements to DFM arrangements. Although FCAM argued to the contrary and the Judge was cognisant of the tensions in applying the suitability requirements to a DFM service, ultimately he concluded that in providing such a service FCAM made serial decisions to trade to which the requirements of COBS 9.2 applied.

The Judge also agreed with Mr Rocker that in making investments that took the IC Portfolio beyond the agreed risk profile FCAM had breached COBS 9.3.1G(2). However, this added nothing in terms of causation and loss to the finding of breach of contract in respect of this. Interestingly the judgment did not address the issue that COBS 9.3.1G is guidance and so not itself actionable. It is not clear why this is not addressed but in practice it is unlikely to be material as any breach of COBS 9.3.1G would most likely also result in a breach of the underlying suitability rule in COBS 9.2.

Mr Rocker raised a number of additional COBS rules he alleged FCAM had breached, none of which made any difference to the ultimate outcome. In particular, he alleged breaches of COBS 2.2, 4.5.2 and 14.3.2 in that inadequate information about the investment strategy and individual investments were provided to him. On this, the Judge was satisfied that what FCAM had provided was adequate: it had agreed the specific investment strategy with Mr Rocker and provided substantial information about the types of investment that would generally be included and he had been provided with frequent product notes and had regular relationship meetings. The Judge observed that, especially with a sophisticated client, it is not necessary for the client to understand every detail of the investment, as that is the essence of what the client is entrusting to the DFM provider.

As noted above, Mr Rocker sought an award reflecting both (1) capital loss (i.e. the diminution in value of his portfolio); and (2) opportunity loss (i.e. the additional sum that would have been earned on his investment but for the breaches).

The Judge's comments on (1) are potentially helpful to anyone performing redress calculations on a portfolio, in particular his pragmatic approach to dealing with the potential for speculation upon speculation. Mr Rocker argued he should recover all losses incurred on his IC Portfolio in periods where the risk profile exceeded the agreed risk mandate. FCAM argued it was necessary to identify the particular trade which resulted in a breach of mandate and only losses attributable to that trade should be compensated for. The Judge agreed with Mr Rocker and in doing so relied on the observations of Leggatt J in Yam Seng Pte v. International Trade Corp [2013] 1 Lloyds Rep 526:

"courts will do the best they can not to allow difficulty of estimation to deprive the claimant of a remedy, particularly where that difficulty is itself the result of the defendant's wrongdoing … Accordingly the court will attempt so far as it reasonably can to assess the claimant's loss even where precise calculation is impossible … it is fair to resolve uncertainties about what would have happened but for the defendant's wrongdoing by making reasonable assumptions which err if anything on the side of generosity to the claimant where it is the defendant's wrongdoing which has created those uncertainties."

By way of further example, in respect of breaches of the "stop loss" protection, Mr Rocker argued he should also recover any additional losses on all investments that were sold at a loss greater than the point at which the "stop loss" protection should have kicked in. His expert conceded that this approach potentially over- or understated Mr Rocker's losses, but, without having daily valuations and reworking the entire investment history, nothing better was feasible and that process would be open to substantial speculation as to what the funds would have been invested in instead. FCAM submitted that this was over simplistic but was unable to present a credible alternative that did not also involve substantial speculation so the Judge accepted Mr Rocker's approach.

In respect of (2), Mr Rocker argued that his opportunity loss should be assessed by reference to how his investment would have performed if invested in line with the relevant APCIMS benchmarks, a point which was inevitably linked to the claim regarding investment allocation. Helpfully for FCAM, the Judge considered this additional claim "misconceived". The compensation required for a breach of contract/duty claim is to put the claimant in the position he would have been in were it not for the specific breaches that occurred (i.e. had his money not been put into the specific investments that were in breach of mandate and had the failures to operate the stop loss properly not occurred). It is not to put him in the position he would have been in had he been in totally different investments. To find otherwise would have been contrary to the finding that there was no obligation to invest in accordance with the benchmarks and also have the effect of removing any risk in an investment strategy which he had expressly agreed to.

The findings in respect of the breaches of client mandate/COBS were not especially surprising on the facts of this case. Although these findings were unhelpful to FCAM, the Judge's rulings in respect of Mr Rocker's benchmark claim will generally be of comfort to providers to DFM services both in refusing to impose any requirement as to asset allocation or performance and refusing to award opportunity loss damages. On this point there is evidently some scope for a different outcome in a situation where failings are more widespread and/or such as to impact on the overall suitability of the discretionary portfolio in a fundamental way.

Firms that offer a DFM service and whose agreements or other materials contain references to "stop loss" protections should review the wording of these provisions and ensure the wording reflects how they are operated in practice. To the extent that DFM providers use their stop loss alerts as an internal discretionary management tool, rather than a trigger for automatic sale, they will need to give this particularly careful scrutiny to check operation of the stop loss is consistent with their contractual obligations and clear to customers. They may need to assess whether changes made need to be made to customer documents, or how the stop loss is operated in practice to protect themselves.

The judgment is also of interest in its acknowledgement of the tensions in applying the COBS provisions especially around suitability to a DFM service. To the extent any DFM providers are not applying COBS 9 requirements this judgment is a clear indicator that they should be and should consider having a process in place to record suitability assessments in respect of decisions to change investments in a portfolio.