Shearman & Sterling LLP | FinReg | EU FOREX Broker Faces Proceedings in Czech Courts Brought by "Consumer" Client Following EU Opinion
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  • EU FOREX Broker Faces Proceedings in Czech Courts Brought by "Consumer" Client Following EU Opinion
    04/24/2019
    Individuals who act outside their trade or profession when instructing brokers to execute FOREX contracts on their behalf must be regarded as "consumers" for the purposes of the Recast Brussels Regulation, according to a recent opinion issued by the Advocate General of the Court of Justice of the European Union. This applies regardless of the expertise of the individual or their active involvement in placing orders. Under the Recast Brussels Regulation (which governs jurisdiction between EU member states), "consumers" are entitled to bring proceedings before the court of the Member State in which they are domiciled, as opposed to being obliged to rely on the courts of the respondent counterparty's Member State.

    In this case, the claimant, a student domiciled in the Czech Republic, had entered into an agreement for the execution of contracts for difference in the FOREX market via Cypriot brokerage company FIBO Group Holdings Ltd. The agreement was expressly subject to the jurisdiction of the Cypriot courts. The claimant brought a claim in the Czech court, alleging that FIBO had been unjustly enriched when the claimant's instructions to close out a position in U.S. dollars were not acted on promptly. The time delay meant exchange rates had changed before the trade was executed, significantly reducing her profit.

    The Czech court initially discontinued the proceedings on the basis it lacked jurisdiction, on the basis that:
     
    1. the claimant could not be regarded as a "consumer" for the purposes of the Recast Brussels Regulation given, inter alia, the knowledge and expertise the claimant exhibited in entering into FOREX contracts and was not therefore eligible to rely on the Regulation to bring her claim in the Czech courts;
    2. the section of the Recast Brussels Regulation on which the claimant relied to bring her claim in the Czech Republic should be interpreted in the same way as a corresponding provision under the Rome I Regulation, which expressly excludes financial instruments of the type in question; and therefore
    3. the jurisdiction clause under the FIBO brokerage agreement which established the Cypriot courts as having jurisdiction was valid.

    On appeal, the Supreme Court of the Czech Republic referred to the Court of Justice of the European Union for a ruling on whether an individual who engages in FOREX trades on their own account should be regarded as a "consumer" for the purposes of the Recast Brussels Regulation.

    The Recast Brussels Regulation dictates that a "consumer" may bring proceedings against a contractual counterparty in the Member State in which the consumer is domiciled if the contract in question (i) is for the sale of goods on instalment credit terms; (ii) is for a loan repayable by instalments made to finance the sale of goods; or (iii) has been concluded with a person who pursues commercial or professional activities in the Member State of the consumer's domicile or, by any means, directs such activities to that Member State or to several States, including that Member State, and the contract falls within the scope of the commercial or professional activities being performed by the counterparty.

    "Consumer" is not explicitly defined under the Recast Brussels Regulation, but broadly refers to an individual contracting for a purpose which can be regarded as outside their trade or profession. Rome I (which determines the law governing contractual obligations) contains a virtually identical description of a "consumer". The scope of Rome I is intended to be substantively consistent with the Recast Brussels Regulation and, significantly, Rome I does not apply to financial instruments (which are defined by reference to MiFID II and, under that Directive, include CfDs). It therefore fell to the Advocate General to consider whether, given the similarity in description of a consumer and the intended scope of the two Regulations, CfDs should also be excluded from the regime of the Recast Brussels Regulation.

    In his opinion, the Advocate General stated that:
     
    1. no account should be taken of the knowledge of the individual entering into such contracts, or of the value or frequency of those contracts, when determining whether the individual should be classed as a "consumer";
    2. the exclusion of CfDs from the scope of the corresponding provisions of Rome I (based on the definition of such financial contracts under MiFID II) was irrelevant for the purposes of the Recast Brussels Regulation, meaning financial contracts should fall within the scope of the latter; and
    3. the concept of "retail client" as defined under MiFID II was distinct from the concept of "consumer" under the Recast Brussels Regulation. A retail client under MiFID II may not, therefore, necessarily be a consumer under the Recast Brussels Regulation and an individual's status as a retail client under MiFID II was irrelevant in determining whether they were a consumer for the purposes of the Recast Brussels Regulation. As a result, warnings by FIBO that retail clients should not participate in FOREX trades had no impact on the conclusion of the opinion.

    The opinion acts as a warning to brokers that an express choice of jurisdiction under brokerage agreements may not be upheld by EU courts, which could lead to proceedings being held in a foreign Member State.

    View the decision.

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