For most people, including those in the financial services industry, the global financial crisis was an unforeseen turn of events whose depth and reach were of shocking proportions. In the pre-GFC world, financial business had been conducted, and advice had been given, in a climate where the collapse of the likes of Lehman Brothers and a sudden and dramatic contraction of global markets were virtually unthinkable.
Following the development of the crisis and the widespread losses that flowed from it, many have sought to recoup their losses from banks and financial advisers who, they claim, ought to have warned them of the risk of the losses occurring. In the very early days of the crisis, the finance industry and public alike appeared to acknowledge that the crisis had not been foreseen. As a result, it looked as if disgruntled investors would have an uphill battle recovering their losses from advisers who had failed to warn of the risks that eventuated with the collapse of the markets.
It was against this general history that the English Judge Havelock-Allan QC in the Bristol Mercantile Court handed down his 2011 decision in Rubenstein v HSBC Bank PLC  EWHC 2304. In that case, it was held that although the bank had negligently advised its customer, Mr Rubenstein, to invest in an AIG bond, the loss that flowed from that investment during the height of the GFC was not caused by the bank’s negligence but by the “unthinkable” and “unprecedented” market turmoil in September 2008. As a result, Mr Rubenstein’s loss was considered to be unforeseeable and hence too remote to be recoverable.
Many in England’s finance industry breathed a collective sigh of relief.
That relief, however, was short-lived.
In September 2012, England’s Court of Appeal overturned Judge Havelock-Allan’s decision and, in doing so, sent a clear message to English courts that the unthinkable and unprecedented nature of the global financial crisis does not automatically mean that losses flowing from it were unable to be foreseen by those in the finance industry.
Briefly, the facts of Rubenstein were as follows: In 2005, Mr Rubenstein sold his home and wished to invest the proceeds from the sale in a “safe place” pending his purchase of another property. He was a retail customer of HSBC so he approached them to discuss investment possibilities. In doing so, Mr Rubenstein advised the bank that he was looking for a better return on his capital than the bank’s advertised deposit interest rates, but that he could not afford any risk of capital loss.
The financial adviser at the bank suggested that Mr Rubenstein invest in an insurance based bond with AIG Life ("the bond"). He told Mr Rubenstein that the bond was as safe as a cash deposit at HSBC. In reliance on this, Mr Rubenstein invested his capital in the bond. What the adviser did not tell Mr Rubenstein was that the bond was not a cash deposit but would be invested in the market.
Some three years later, rumours of AIG’s bankruptcy arose amid the impending collapse of Lehman Brothers. There was a run on AIG in the midst of which Mr Rubenstein attempted to withdraw his capital. AIG suspended withdrawals and Mr Rubenstein was unable to extract his money. The bond was later closed and, ultimately, Mr Rubenstein received less than the capital he had originally invested. He sought to recover his losses from HSBC.
Ultimately, the Court of Appeal held that Mr Rubenstein’s loss was caused by the collapse in the value of market securities in which the bond had been invested. That, they said, was foreseeable. The Court acknowledged that the losses may have been unforeseeably high, but observed that that is the nature of markets in times of stress. Mr Rubenstein’s losses represented an unforeseeable extent of loss of a kind or type which was foreseeable. As a result, Mr Rubenstein was permitted to recover the losses of capital from the bank.
Following hot on the heels of the decision in Rubenstein came the decision of the Federal Court of Australia in Bathurst Regional Council v Local Government Financial Services Pty Ltd  FCA 1200. In that case, 13 local councils claimed for losses they had suffered following their investment in what were described as “grotesquely complicated” synthetic collateralised debt instruments. A large proportion of the money invested by the councils was lost as the events of the GFC unfolded.
The Federal Court in that case looked at the cause of the losses suffered by the council and rejected the suggestion that the losses were caused by the unforeseeable global financial crisis. The Court conceded that the phenomenon labelled the “GFC” may not itself have been reasonably foreseeable. However, the Court found that the councils’ losses were caused not by the GFC but by the sustained widening of credit spreads which occurred in 2007 and 2008. Although the widening of credit spreads occurred in the context of the GFC (and were exacerbated by it), the court found that credit spreads were a foreseeable and foreseen risk of loss. Thus, the councils were permitted to recover.
It now appears courts are looking with precision at the cause of losses that have arisen in the context of the GFC and that defences based primarily on the unforeseeability of the GFC will have limited effect. These recent decisions might encourage a rise in claims against finance professionals in respect of losses flowing from the GFC, particularly given that for many claims arising out of the events of the GFC, the relevant limitation period is coming to an end. However, there are a couple of things to note:
Firstly, none of this means that claims against finance professionals will be easy. Both Rubenstein and Bathurst Regional Council turn on their own facts and a careful analysis of the scope of a finance professional’s duties will be required before reliance can be placed on those decisions to support a claim in different circumstances.
And secondly, Mr Rubenstein and all of the 13 regional councils involved in the Bathurst claim were unsophisticated investors who relied heavily (and reasonably) on their financial advisers. It remains to be seen whether a similar decision would be made in a claim involving sophisticated investors.