In the most recent so-called 'mis-selling' case in Hong Kong, three claimant investors succeeded in establishing that a bank owed them a contractual duty to exercise reasonable care and skill with regard to their portfolio of investments held with the bank. They also established (among other things) that the bank owed a continuing duty to warn them about risks inherent in the investments offered. While Chang Pui Yin v Bank of Singapore Ltd(1) is a rare example in Hong Kong of a bank being found to have owed an advisory duty and to have breached it, the case turned on its facts – in particular, the bank was not acting on an execution-only basis as its customer relationship manager (a bank representative) advised the investors, who were wealthy but unsophisticated elderly investors looking to protect their wealth and who placed complete trust in the bank representative.
Background – a 'Hong Kong story'
The claimant investors represent a true 'Hong Kong story' and their claim is a throwback to the years that preceded the financial crisis in 2008. They were a husband and wife couple who had worked hard all their life and emigrated to the United States before returning to Hong Kong in 1998. Around that time they became familiar with the bank's customer relationship manager, who worked at another international bank. The relationship manager moved to the bank in 2004 (a predecessor entity) and the claimants continued their banking relationship with her. They became friends.
The husband and wife were not wealthy until the husband came into substantial wealth in 1997. They were unsophisticated investors who wanted to protect this new wealth. They were not looking to chase 'yield' or to speculate and appear to have been classified by the bank as having (in the main) a low to medium-risk tolerance.
In the main, the claimants and their investment vehicle appear to have relied on the relationship manager with respect to the choice of their investments and the make-up of their portfolio. They also appear to have had complete confidence in her. Their relationship with the bank was governed by various services agreements and bank mandates.(2) They signed several risk disclosure statements.
The bank's general terms and conditions contained provisions such as the following:
"C. INVESTMENT SERVICES - TERMS AND CONDITIONS APPLICABLE TO INVESTMENT AND TRADING SERVICES
(1) Permissible Investments
If you request investment Services, the Bank will purchase, sell and hold investments for your Account(s) and provide other Services incidental to this activity as set forth in this Agreement. Investments will be as directed by you in the case of custody Accounts (Custody Accounts) and Accounts which are established on an advisory basis only (Non-Discretionary Accounts)...
The Bank, its Affiliates and/or their staff may provide you with information and express views in relation to Investments. Such provision of information and expression of views shall not constitute the giving of investment advice (save for the giving of advice in respect of a Client's Discretionary Account) and the Bank, its Affiliates and their staff shall have no liability in respect thereof."
It was undisputed that the claimants' account with the bank was non-discretionary. From about 2005 the claimants appear to have invested in numerous higher risk (and sometimes rather exotic) investment products on the relationship manager's recommendations, such that by 2008 much of their overall portfolio with the bank was higher risk. They appear to have relied heavily on the relationship manager's advice.
The global financial crisis then happened and the claimants suffered significant losses.
The claimants sued the bank. The case proceeded to a 10-day trial for a decision on liability first. In short, the claimants argued that the bank owed a contractual duty (implied at law) to exercise reasonable care and skill to ensure that their investments suited their risk tolerance and to warn of risks inherent in any investment products that did not match their risk profile.
The bank's position was that it did not provide an advisory role to the claimants and this was borne out by the bank's terms and conditions and risk disclosure statements signed by the claimants.(3) The bank argued that its relationship manager provided investment information but did not advise. Further, the bank argued that, among other things, the claimants were precluded from setting up an advisory duty against the bank on the basis of the bank's general terms and conditions (a contractual estoppel).
Based on the services agreements, the documentary records, the evidence of the elderly couple and the parties' respective expert witnesses (regarding the investment products and portfolio), the judge found that the bank had owed a duty to act with reasonable care and skill and that it had breached that duty.
The judge considered that based on the wording of the bank's terms and conditions, the general disclaimer of liability for advice applied to custodial accounts but not to discretionary accounts as expressly stated in Clause C(4) above nor, importantly, to non-discretionary accounts "established on an advisory basis only". This finding by the judge was a matter of contractual interpretation, applying well-established principles.(4)
The scope of the bank's duty was to act with reasonable care and skill because it was providing an advisory service in the course of a business.(5)
The judge found that the bank (through its relationship manager) had breached its duty to the claimants by:
- failing to ascertain and have regard to the claimants' investment objectives;
- failing to offer suitable products; and
- failing to warn of the risks inherent in the investments offered.
The judge concluded that these breaches occurred when the relationship manager offered unsuitable investment products and there were continuing breaches for almost the entirety of the time that one or more of the claimants maintained their account with the bank.
In passing, the judge found the elderly couple's testimony at trial to be far more convincing than that of the bank's relationship manager. The same might be said of the parties' expert reports.
Interestingly, had the judge found that the bank acted on an execution-only basis, he would have gone on to hold that it could succeed in its defence of contractual estoppel. The judge also considered that had the bank succeeded in arguing that it was not acting in an advisory role, the terms and conditions that purported to define the bank's role would not have amounted to an exclusion of liability; therefore, such terms would not have been subject to a test of reasonableness.(6)
The judgment is long and only a finding on liability. Issues such as proof of loss and quantum will be dealt with at a separate (assessment) hearing, unless settled beforehand.
The finding that the bank owed an advisory duty distinguishes the case from most other 'mis-selling' cases in Hong Kong since 2008.(7) In most of those other cases, the banks have been able to establish that they were acting on an execution-only basis and that the claimant investors were precluded from arguing otherwise as a matter of contractual estoppel. Indeed, the judge in Chang Pui Yin v Bank of Singapore Ltd was also of the view that contractual estoppel had a sound legal basis in cases where it applied and if it was to be overturned, as a matter of legal principle, that was a matter for an appeal court.(8)
The outcome in the case should not ignore the personal characteristics of the husband and wife. At material times they were elderly and by the time of trial he was about 90 years of age and she 80. They do not appear to have understood the nature of many of the higher risk investments. In that respect, they were unsophisticated investors and the case specifically approved the important judgment in Field v Barber Asia Ltd.(9) The elderly claimants were apparently not seeking to trade their investments.(10)
The judge specifically declined to find that the bank had acted unconscionably or that the claimants had been subjected to any "undue influence".
The outcome in the case is also a glimpse of things to come. The emphasis by the judge on the unsuitable nature of the investments (on the facts) is not dissimilar to the nature of the 'suitability' clause that banks and financial intermediaries in Hong Kong will have to include in their client agreements by June 9 2017.(11)
At present, there is no indication of an appeal by the bank. There are potential appeal points (both matters of fact and law), but they will be difficult to succeed on in the circumstances. There is also the point that, as in Field v Barber Asia Ltd, on appeal the financial adviser's position may not attract much sympathy compared with, for example, the claimants. With this in mind the final word should, perhaps, be the judge's concluding remark:
"In all these mis-selling cases, private banking relationship managers rightly complain that their clients accuse them of wrongdoing when markets fall and forget about all the profits they accumulated when times were good. Such clients deserve no sympathy. They knew the risks involved and took them with eyes wide open. They took huge bets and, when markets were favourable, enjoyed amazing returns on their investments. When markets went south they employed smarts lawyers to look for loopholes in the banking documentation in order to sue their private bankers. The Changs are wholly different from the vast majority of plaintiffs pursuing their private bankers in our courts. The Changs were elderly, unsophisticated clients to whom [the bank's relationship manager] was keen to sell investment products which they little understood. The Changs did not make informed choices. They entrusted their money to [the bank's relationship manager]. They had no proper understanding of the products that [the bank's relationship manager] told them to buy and no understanding at all of the risks involved."
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(2) The main services agreement appears to have been governed by Singaporean law. However, no evidence was adduced suggesting that the relevant legal principles differed in any significant respect from Hong Kong law (supra note 1, at paragraph 123).
(7) For further details please see "Mis-selling claim fails on appeal", "Investor's claim sets up advisory duty" and "Still no joy for investors' mis-selling claims". 'Mis-selling' is a term of art, not a legal definition.
(8) Supra note 1, at paragraph 155. Also see Yang Dandan v Hong Kong Resort Co Ltd, CACV 247/2015,  HKEC 1722, at paragraph 81 and "Mis-selling claim fails on appeal" (endnote 6).
(10) Contrast with those alleged 'mis-selling' cases where the claimant investors were arguably seeking to trade their investments or chasing a higher yield. For further details please see "Mis-selling claim fails on appeal" and "Still no joy for investors' mis-selling claims".
(11) See "Investor's claim sets up advisory duty" (endnote 7).
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