Financial advisers: do you know the difference between execution only and advised sales?

06 Nov 2012

In the recent case of Rubenstein v HSBC, the High Court handed down valuable guidance as to the circumstances in which the giving of information about a financial investment can amount to the provision of investment advice (as opposed to a transaction proceeding on an “execution only” basis, without advice been provided) such that an adviser may then be liable to a customer in negligence and/or for breach of contract if that advice subsequently turns out to have been bad advice.

In 2005, Mr Rubenstein was looking to invest the proceeds of the sale of his house whilst he looked around for a new property. He told one of the Bank’s financial advisers that he wanted ready access to the money, and was looking for a better interest rate than he had been able to find advertised.

The Bank gave Mr Rubenstein details of an AIG fund. Mr Rubenstein said that he could not accept any risk to his capital and asked the Bank to confirm the risk associated with the AIG fund; the Bank replied that the risk was the same as if the cash was in a deposit account. ONM that basis, Mr Rubenstein invested in the AIG fund.

In September 2008, following the turmoil in the financial markets, Mr Rubenstein withdrew his money from the AIG fund. He received less than his original investment.

Mr Rubenstein then started proceedings against the Bank claiming damages for bad investment advice. The Bank denied having given advice to Mr Rubenstein and said that the basis of its contract with Mr Rubenstein was “execution only”

The Court held that a by-stander, reading the communications between Mr Rubenstein and the Bank and the Bank’s records, would have concluded that this was being treated as an advised transaction rather than “execution only”. The Court said that the key here to determining between the two was whether “the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.”

The Court said that the starting point was to look at the nature of the customer’s enquiry. If a customer asked for a recommendation, any response was likely to be advice, unless there was an express disclaimer to the contrary. If a customer made a purely factual enquiry, a reply that simply provided relevant information would be providing no more than information. The Court said that the test was whether an impartial observer, against the background of the regulatory regime, and to what passed between the parties, would conclude the advice had been wrongly given.

Adopting that approach, the Court concluded that the Bank had given advice to Mr Rubenstein. Furthermore, it had been negligent in recommending the AIG fund; it had wrongly represented to Mr Rubenstein that it would be the same as cash deposit and it had not considered the suitability of other funds. Mr Rubenstein had relied on the Bank’s response to provide him with reassurance that the AIG fund met his requirement of minimal risk to capital and, “but for” the negligence by the Bank, Mr Rubenstein would not have invested in the fund.

Notwithstanding the above, there was no happy ending for Mr Rubenstein as the Court concluded that Mr Rubenstein’s loss had not been caused by the Bank’s negligence. The Court held that what had happened to the AIG fund after September 2008 was wholly outside the contemplation of the Bank (or indeed any competent financial advisor) in 2005 when the advice was originally given to Mr Rubenstein. The loss was not reasonably foreseeable by the Bank and was too remote to be recoverable in contract or tort.

MORE DETAILS

Rubenstein v HSBC Bank Plc [12.09.12]

Court of Appeal overturns controversial High Court decision on causation in claim by consumer concerning negligent financial advice.

In August 2005, Mr Rubenstein sought to invest the proceeds of the sale of his home while he searched for a new property. He informed HSBC that he wanted an investment that would:

• Be liquid, so that he could buy a new property at short notice
• Provide higher interest than a standard deposit account
• Involve no risk at all to his capital investment

On their advice, he invested £1.2 million in a bond that invested in a range of assets. He was still invested in 2008, when the market turmoil began. He tried to withdraw his investment but was unable to do so due to a moratorium and, ultimately, lost close to £180,000, which he sought to recover from the bank.

At first instance, the court had found that, although the bank had given negligent advice that there had been no risk to his capital and he had relied on that advice, Mr Rubenstein’s loss had not been caused by that advice but by “unprecedented market turmoil”, including a run on the provider of the bond. The loss was not recoverable from the bank, as it had not been foreseeable and was too remote. Accordingly, Mr Rubenstein was awarded only nominal damages in contract. He appealed.

Decision

The Court of Appeal allowed the appeal. It found that Mr Rubenstein had expressly instructed the bank that he required an investment that would protect him from market forces and the loss arose precisely because the bank had failed to recommend such an investment. The Court of Appeal also played down the importance of wider events, finding that a fall in the value of the investment had indeed been foreseeable, not least because that risk was mentioned in the product literature. Therefore, there had been no new unforeseeable event between the advice given and the loss; the advice had caused the loss. It was also held to be irrelevant that the loss caused by market forces was larger than might have been foreseen.

Comment

The Court of Appeal found that the individual adviser at the bank had not known himself that the investment had been riskier than a deposit account and that the bank had clearly breached its duties to the investor. They noted that, from the bank’s perspective, that is not a good starting point for a denial of liability.

Many similar claims are dealt with by the Financial Ombudsman Service (FOS). The court effectively endorsed a recent FOS decision based on similar facts; that it was “fair” that an adviser should pay all losses incurred, as the investors would not have invested at all if they had not received the negligent advice.

The judgment also emphasises the importance of ascertaining the scope of the instructions to the adviser. In this case, it was held that the bank had been required to guard against the risk of market forces affecting the value of the underlying assets. If an investor was negligently advised about the market risks associated with a product, it will be no defence that a market fall caused a greater loss than could reasonably have been foreseen at the time of investing.

http://www.kennedys-law.com/casereview/financialadviceandmarketdownturns/