‘FSCL foils felonious filch’

Freddie’s Forex (Freddies) was an established overseas-based foreign exchange business. To facilitate its business, it contracted with a transactional service provider (TSP) to hold accounts in all the different currencies which Freddies transacted.

Freddies’ clients would buy different currencies from Freddies directly and Freddies would then make deposits into its various accounts with the TSP.

In June 2016 the TSP amended its terms and conditions, adding a new section called ‘restructuring, suspension, risks of seizure, freezing or loss of access to funds’ which gave wide powers to the TSP, including purporting to permit it to appropriate clients’ funds. 

Six months later, the TSP suspended Freddies’ accounts and appropriated 51% of Freddies’ deposits, totalling $70,768. Freddies complained to the TSP demanding that the TSP return and release its funds. The TSP advised that it could not return the funds as it had assigned Freddies’ funds to another company.

Freddies’ was appalled that the TSP had essentially stolen its money and severely impacted Freddies’ ability to keep trading. After getting no response from the TSP to Freddies’ requests, Freddies complained to FSCL.

Freddies’ view

Freddies’ view was that the TSP had acted beyond the scope and intent of the contract between the parties and had stolen Freddies’ funds.

The TSP’s view

The TSP considered that it had acted legally and in line with the terms and conditions of its standard contract. The TSP considered that if it did not seize the funds, it would have been forced to liquidate and Freddies’, and other clients’, funds could have been lost completely.


We asked the TSP for its full terms and conditions, and a detailed explanation of the transfer and reasons for the suspension and appropriation of Freddies’ funds. The TSP explained that it had been subject to seizures of funds by overseas police agencies and it had disputed debts with its own service providers.

The TSP said it was necessary to appropriate its client’s funds pursuant to its term and conditions so that it could continue to operate and hopefully repay its clients’ funds over time.

We reviewed the previous and amended terms and conditions. We considered it arguable that the amended terms and conditions permitted the TSP to appropriate client funds. We noted that the seizure and restructure term would operate similarly to the open bank resolution which applies to New Zealand’s registered banks. However, given the very serious nature of these changes, we considered that the TSP had not taken reasonable steps to explain or notify Freddies or other affected clients of these important changes.

A single e-mail message, sent via the TSP’s internal message platform, was the only notice the TSP gave Freddies of the change. In the circumstances, we considered the TSP had given insufficient notice of the amended terms to Freddies, and therefore Freddies were not bound by the new terms and the TSP could not rely on them to appropriate Freddies’ funds.

The TSP argued that its previous terms and conditions, which bound Freddies, included a suspension clause and a transfer clause which gave the TSP the power to appropriate Freddies’ funds.

We considered that the suspension clause only permitted the TSP to suspend operation of Freddies’ accounts. There was no right for the TSP to appropriate or transfer funds out of Freddies’ accounts and the TSP had to hold suspended funds securely.

Novation of the contract

The TSP argued that the transfer clause gave it an unrestricted right to assign to a third-party the TSP’s obligation to repay Freddies’ funds. Transferring obligations in contract is done by a process of novation where one party is substituted for another.  The TSP relied on the transfer clause and a recent Supreme Court case, which had expanded the common law requirements of consent to novation, to say that it had substituted itself for a related company (which had no assets and to which all the other TSP’s debts had also been novated) and it was not obligated to repay Freddie’s funds.  

We distinguished the Supreme Court case because the related company could not provide the same service to Freddies as the TSP had contracted to carry out. We also considered that any right of novation could not be considered to be unrestricted or absolute.

We found that Freddies had not agreed or consented to the novation in any way by its agreement or conduct. We also considered that the TSP’s right to transfer should be read as a part of the contract as a whole, and that the exercises of any powers must be for legitimate contractual purposes.

We were not satisfied that the TSP was acting in a way that related to the normal operation of the contract or that had been legitimately anticipated by the contracting parties.


We recommended that the TSP immediately pay Freddies the funds that it had appropriated and novated without Freddies’ consent. We also recommended that the TSP pay interest on the funds that it had appropriated from the day the accounts were suspended until they were released to Freddies, and make a $2000 contribution to Freddies’ legal costs.  

In total, we recommended the TSP pay to Freddies $75,766 in full and final settlement of Freddies’ complaint, which Freddies accepted.   

Key insights for consumers

General contract law principles apply to every contract. If the terms are not clear and agreed to by both parties to the contract, then they are not binding. If you have a dispute about the contract with a financial service provider, you can complain and, if the complaint is not resolved, FSCL can help.