Like the proverbial buses that eventually arrive in pairs, at a time when there has been much controversy about the issue of causation, it is ironic that there have now been two significant High Court judgments setting the position within the regulated sector in stark contrast to the general law as interpreted by the Courts. In another high profile, high value, High Court action, an adviser has escaped very significant liabilities by relying on a causation defence which would not only be unreliable before the FOS but may, in due course, become invalid in financial services law.

Following swiftly on from the Bristol District Registry case of Rubenstein v HSBC (on which I commented again last week), on 4 October the High Court in London handed down judgment in the case of Zeid v Credit Suisse. Mr Zeid (who sadly died before his claim reached Court) lost a staggering US$69.4m on a series of ten structured product notes known variously as “callable bullish notes” and “trigger notes”.

The key preliminary question was whether Credit Suisse gave Mr Zeid advice and, therefore, ‘personal recommendations’ for the purposes of the COB and then COBS suitability rules. Like Rubenstein before it, the case contains a useful discussion of the meaning of ‘advice on the merits’ for the purposes of the rules, noting that “advice requires an element of opinion on the part of the adviser“.

Having found that personal recommendations had been made, the Judge concluded that only the latter three notes were unsuitable given the worsening economic climate in 2008. However, he held that the breach of rules and negligence did not cause the losses in respect of those last notes because by that time Mr Zeid was familiar with the idea and would have gone ahead with the investments anyway.

With nearly US$70m at stake, the case provides graphic illustration of the importance to advisory firms of the causation defence. If the current discussion instigated by the FSA about reliance on causation defences were to result in a change to s. 150 FSMA this case would be a prime example of a very expensive liability in circumstances where, as a matter of current law, the breach did not cause the losses. Had the case gone to FOS it is entirely possible that the outcome would have been very different as FOS is not bound by the law of causation (see IFG v Jenkins). Unlike Rubenstein (where the loss ended up at only £30k over the FOS £100k limit), Mr Zeid’s claim was eminently unsuitable for the FOS jurisdiction.

Again like Rubenstein before it, the case addressed a number of other interesting and familiar regulatory issues, providing noteworthy judicial interpretation:

  • Joint clients – whilst it was accepted that Mr Zeid’s wife and daughters were jointly clients of Credit Suisse with him, the Judge commented that, because they allowed him to deal on their behalf in every respect, “I do not consider that they can assert that what was suitable for him was not suitable for them”
  • Client categorisation – it was not disputed that Mr Zeid was a ‘private customer’ under COB and then a ‘retail client’ under COBS. Although, in the end, it was his sophistication that provided the defence to his claim, Credit Suisse would have saved itself a lot of bother had he been (properly) classified as an ‘intermediate customer’ under COB and an ‘elective professional client’ under COBS
  • Terms of business – the Private Banking Agreement used by the bank included terms stating that it would provide an ‘Advisory service’ pursuant to which it was to “give investment advice to the Client and effect transactions on an advisory or execution-only basis”. It is perhaps unsurprising that, given COB was engaged by making a personal recommendation, Credit Suisse failed to persuade the Court that it was effecting execution-only transactions as part of its ‘advisory service’! As noted by the Judge in Rubenstein, it is for the firm to make clear the nature of the service being provided
  • Internal documents – Credit Suisse’s argument that it did not advise Mr Zeid was also not helped by using internal documents with names such as “Transaction Suitability Form” and other forms referring to the “Adviser”, expressly stated to be “responsible for assessing client suitability”
  • Create and keep records – usually it is the respondent firm that is undone by inadequate record-keeping but in this case the claimants suffered from not having prepared a witness statement for Mr Zeid before he sadly died.

And my final thought on the case - anyone who calls a product “bullish” is asking for trouble!