High Court decision
Court of Appeal decision

The Court of Appeal has overturned a High Court decision and held that an investor was entitled to recover substantial damages for loss of capital arising from market movements from HSBC as he had specifically sought to protect himself from the risk of market movement at the time he entered into the investment.


The claimant, Mr Rubenstein, was a retail client of HSBC. In August 2005 he telephoned his local branch about investing the sum of £1.25 million. The claimant informed the independent financial adviser at HSBC who dealt with the matter that he required a temporary income-earning investment for this money, the proceeds of which would be used to purchase a new home.

HSBC provided the claimant with a brochure for the AIG Premier Access Bond and quoted the equivalent interest rates for one of the funds within the bond, the Enhanced Variable Rate Fund. The bond also ran another fund, the Standard Variable Rate Fund, which had a lower equivalent interest rate than the enhanced fund and was a slightly lower risk, as the standard fund invested only in financial institution debt rated AA or above (whereas the enhanced fund dealt with debts with a minimum rating of A). However, both the enhanced fund and the standard fund were marketed by AIG as providing good levels of return to more cautious investors and the AIG brochure suggested that investors could consider the bond as an attractive alternative to a high-interest deposit account.

The claimant emailed HSBC on August 24 2005 stating explicitly that he wanted to undertake no risk on the principal sum invested and asked HSBC to confirm the level of risk connected with the enhanced fund. HSBC informed the claimant by email the same day that it "view[ed] this investment [the enhanced fund] as the same as cash deposited in one of our accounts…The risk of default…is similar to the risk of default of Northern Rock".

In September 2005 the claimant invested the £1.25 million in the enhanced fund.

In September 2008 the run on AIG occurred, triggered by rumours that the US branch of AIG was about to go bankrupt. AIG suspended redemptions from both the enhanced fund and the standard fund, as it sought to liquidate their assets to meet all of the investors' withdrawal requests. The claimant was eventually able to withdraw his money in November 2008. He received £179,530.17 less than the original £1.25 million invested.

The claimant alleged that he received negligent advice from the independent financial adviser, and that had he been advised properly, he would have placed the money in a deposit account over the same period (and would have received back the full £1.25 million plus interest).

HSBC disputed that it had provided advice to the claimant, asserting instead that it simply had given information regarding the enhanced fund to the claimant. This argument was rejected by the court, since – in response to the claimant's initial request for a "recommendation" – HSBC had put forward the enhanced fund, but did not include any disclaimer to the effect that no advice was being given. The absence of such a disclaimer meant that HSBC had necessarily advised that the enhanced fund met the criteria outlined by the claimant in his initial request.

Regarding the question of negligence, the court found that HSBC had been negligent in its advice, as it had:

  • not considered the standard fund, notwithstanding the claimant's request for minimum exposure to risk;
  • incorrectly advised that investing in the enhanced fund was the same as a cash deposit. This was fundamentally wrong, as the only risk faced by a cash depositor at a bank is that the bank may itself fail. In contrast, an investor in the enhanced fund took not only the risk that AIG itself might fail, but also that the value of his or her investment in the fund could rise as well as fall depending on market conditions; and
  • failed to explain to the claimant (in breach of Conduct of Business (COB) rules) that he was taking a risk of not getting back all the capital that he had invested.

High Court decision

At first instance, the High Court held that although HSBC was negligent and in breach of COB rules, in advising the claimant to invest in the AIG Enhanced Variable Rate Fund, it was not liable for the investment losses. The High Court found that instead, the losses at AIG were caused by the market turmoil following the collapse of Lehman Brothers in September 2008, and held that this was not reasonably foreseeable when the advice was given in 2005. Accordingly, the claimant was awarded only nominal damages in contract.

Court of Appeal decision

The key issue for the Court of Appeal to consider was the remoteness of loss.

Reflecting on the previous judgment, the Court of Appeal considered that in determining causation, the High Court had selected one causal factor – the unprecedented run on AIG – from a number of possible causal factors. This selection was incorrect. The Court of Appeal held that against the background of facts and the original transaction, together with the scope of HSBC's duties, what connected the erroneous advice and the claimant's loss was the combination of placing the claimant's investment into a fund which was subject to market losses while simultaneously misleading him by stating that the investment was the same as a cash deposit.

The Court of Appeal therefore concluded that the correct selection of cause was the collapse in the value of the market securities in which the enhanced fund was invested. Accordingly, the negligent advice and the loss were not disconnected by an unforeseeable event beyond the scope of HSBC's duty. Although details of the potential losses were set out in the AIG brochure – albeit obliquely referred to as 'costs' that may be incurred should the investor's collective withdrawal requirements force the fund to sell assets before their intended maturity date – it was HSBC's duty to explain the exposure of the fund and the possible losses that could be incurred. Further, while the level of these costs may have been unforeseeably high, the Court of Appeal considered that this was "the nature of markets at a time of stress", which represents an unforeseeable extent of loss of a type which is foreseeable.

Having determined the question of remoteness in the claimant's favour, the Court of Appeal went on to consider the measure of the claimant's loss. The measure and calculation of loss was not challenged on appeal; therefore, the approach to be applied was that which was set out in the obiter comments of the High Court. The loss was therefore "calculated as if HSBC had succeeded in recommending the most suitable investment, using that investment as a comparator". The methodology applied by the High Court was to allocate 10% of the investment to the HSBC Premier account and apply the other 90% of the investment funds to the best of the three-month notice deposit account of the UK clearing banks as of September 22 2005. Applying this methodology, the claimant was awarded agreed damages of £112, 543.


It is interesting to note in the Court of Appeal's judgment the reference to the recent Financial Ombudsman Service (FOS) decision regarding the same AIG bond, which was made after the High Court judgment. The FOS also disagreed with the High Court's conclusions regarding the remoteness of the losses, commenting that "investment is inherently unforeseeable and that extreme market conditions, including the irrational behaviour of other investors, are an established risk of all investments". The Court of Appeal also noted that the Financial Services Authority (FSA) came to a similar conclusion in its final notice issued against Coutts & Co in November 2011. Nonetheless, with the FSA's recent comment (in connection with the fine imposed on Peter Cummings of HBOS) that it considered the credit crunch to be "unforeseeable", it is clear that debate will continue as to whether any part, or the whole, of the financial crisis could be said to be foreseeable.

The High Court's sweeping conclusion that the turmoil which enveloped AIG in September 2008 was not reasonably foreseeable to the claimant's professional financial advisers in August 2005 was a departure from what was commonly thought to be the established law in this area and as such, the Court of Appeal decision can be seen as placing the law back where many considered it was before the first instance decision. However, this decision will apply only to losses caused in capital markets investments where they flow from a risk in relation to which specific protection is sought by the investor. The Court of Appeal also distinguished this decision from the position where the investor is sophisticated. It is therefore unlikely that this decision would have application in the context of claims between investors and hedge funds, private equity funds or other commercially orientated investments.

For further information on this topic please contact Laura Martin at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (

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