The English Court of Appeal has overturned a High Court decision, which awarded only nominal damages to a customer who had relied on negligent investment advice on the ground that the loss in question was not caused by the bank's negligence but by unprecedented market turmoil, which was not foreseeable and therefore too remote.
On appeal, the Court found that it was the bank's negligence that had caused the loss and awarded damages for the actual loss suffered. In this case, but for the erroneous investment advice, the customer would not have made the investment in question. Accordingly the High Court's findings on the issue of foreseeability and remoteness were erroneous.
The type of risk was found to be foreseeable even though the extent of the loss was unprecedented.
Rubenstein v HSBC bank Plc
In August 2005, the customer approached the bank about investing a sum of £1.25 million. He explained to the financial adviser that he was seeking a better rate of interest than was available on deposit accounts. He also stated that he envisaged the investment was only for one year, as he planned to use the fund to purchase a new home.
The financial advisor sent the customer information about the AIG Premier Access Bond ("PAB"). The PAB was a life assurance bond, offering a choice of 14 funds. Units in the funds were held within contracts of insurance and investors in the PAB became policyholders. Two variable rate funds were available within the PAB, with the Enhanced Variable Rate Fund ("EVRF") the more adventurous of the two.
Two days later, the customer sent an email that stated that he could not "afford to accept any risk in the investment of the principal sum". He sought information about what, if any, risk was associated with the PAB. The reply was that "we view this investment as the same as cash deposited in one of our accounts". The only fund within the PAB quoted or mentioned by name was EVRF. No alternative fund within the PAB was discussed.
In September 2008, the customer became aware of rumours concerning AIG's financial position and sought to withdraw his investment from the EVRF. He was informed that withdrawals from the EVRF had been suspended, that the EVRF would be closed in December 2008, and, as AIG was seeking to sell the fund's assets in poor market conditions, policyholders were very likely to receive less than their current holdings. In the end, the customer lost £179,530.17 of his capital.
The High Court found that negligent advice had been given which the customer relied upon, but only awarded nominal damages on the ground that the loss in question was not caused by that negligence but by unprecedented market turmoil which was not foreseeable.
The Court of Appeal's Decision
The Court affirmed the decision of the court below on liability, namely that: (1) advice (as opposed to information only) was given; (2) that advice was negligent; and (3) the customer had relied on the advice and would not have invested in the EVRF but for the negligent advice.
However, the Court rejected the bank's argument that the loss was unforeseeable and too remote (reversing the High Court's decision in this regard):
- Three different categories of risks were identified: (1) the insolvency of Lehman Brothers, (2) the run on AIG's PAB funds which accompanied that insolvency (fear of the default risk) and (3) the collapse of market values of the securities in which the EVRF was invested (market risk).
- The Court found that it was the market risk that ultimately caused the loss that the customer suffered. Accordingly on the issue of causation, what connected the erroneous advice and the customer's loss was the combination of advising the customer to invest in a fund which was subject to market losses while at the same time misleading him by telling him that his investment was the same as a cash deposit, when it was not. It was the bank's duty to protect the customer from such market risk which he had specifically wanted to guard against.
- It did not matter that at the time of investment, the EVRF would have been regarded as without risk, because it was clear on the evidence that the customer would not have chosen the EVRF without the bank's advice and also because had the bank complied with its statutory duty it would have recommended products which reflected a suitable response to the customer's needs.
- It also did not matter that, had the investment lasted for only one year (as was the customer's intention), he would not have suffered the loss as he did (hence the bank's argument that any loss beyond the oneyear period was beyond its scope of duty and foresight). The Court reiterated that since the customer had been negligently informed that the investment was akin to a cash deposit, there was no reason for him to be concerned with changing financial weather, and no reason for the bank to be free of responsibility after one year.
While the circumstances of each case will differ, this English decision takes a robust approach to causation, and is a timely reminder that the defence of unforeseen market turmoil may not always work.