APPLICABILITY OF AUSTRIAN BANKING LAWS

A recent decision (VwGH 25.6.2013, 2009/17/0039) of the Austrian Supreme Administrative Court (Verwaltungsgerichtshof, the “Court”) treats various aspects of Austrian financial services supervision. Its findings demonstrate again that Austrian courts and authorities tend to interpret the applicability of Austrian banking laws broadly.

Facts of the case

The facts of the case are as follows – an investment firm offered its customers within the framework of investment management agreements, participation in a computerised trading system that dealt with futures in the USA. Various customers of the investment firm were subsequently informed that due to a total failure of the routing software, major losses were incurred and trading was suspended. An error log of the system failure, however, did not exist.

One of the customers immediately requested that the trading on his account be suspended. In addition, the customer was given a verbal guarantee statement, which guaranteed the account balance for a fixed period of time, by the chairman of the management board of the investment firm. A copy of this undated guarantee was also sent per fax to the customer.

From the investment firm’s viewpoint the account was closed, and thus, not further observed. Several weeks later, the customer informed the investment firm that against his wishes, further trading was still carried out on his account, with subsequent losses. Confirmation was given by the USA trading company that, as a result of the plummeting numbers, the account was erroneously reactivated.

Merits

In deciding the merits of this case, the Court considered whether the investment firm, carried out trading on the account contrary to the customer’s instructions and whether the securities services company acted on their own account, through the provision of the guarantee without having the required licenses. It was also considered if the security service company had sufficient control and security measures in relation to the electronic data processing procedures.

According to the Court’s findings, a guarantee for certain monetary benefits given by the management board of an investment firm for the event of a loss, is attributable to the company and constitutes a guarantee according to the Austrian Banking Act (Bankwesengesetz, “BWG”). Although no remuneration is required for the individual guarantee, commerciality is still present, when this forms part of the business with the customer.

The Court stated also that the trading of futures in conjunction with a third party, for the benefit or detriment of a customer, does not relate to asset management, but to the trading of futures and options according to the Austrian Banking Act.

In addition, the Court clarified that the compliance requirements of Section 18 of the Securities Supervision Act (Wertpapieraufsichtsgesetz, “WAG”) are infringed, even when software problems cannot be traced due to the lack of a system log.

It also resolved that it is sufficient for Austrian laws to apply from a territoriality perspective when guarantee statements or instructions relating to the changes in account balances, originate from the domestic company headquarters.