As we have reported in previous editions of this Financial Litigation briefing,22 investors have generally had a hard time pursuing so-called “mis-selling” claims against banks and other financial intermediaries in Hong Kong. To date, the banks and intermediaries have been able to rely on their standard terms of business to exclude liability and to assert that they are acting on an execution only basis (ie, no advisory duty), even where the evidence suggests that they have given advice on which an investor has relied.
In Li Kwok Heem v Standard Charted International (USA) Ltd,23 the plaintiff lost all of his investment in a hedge fund that turned out to be part of the Madoff “Ponzi” scheme. He had made the investment on the recommendation of the bank’s representatives. However, the bank’s official position was that it was not “advising” and that its standard terms prevented the plaintiff from claiming otherwise.
In an interesting judgment, the court held that the bank’s representatives had, as matter of fact, made representations to the plaintiff as to the suitability of his investment in the hedge fund and he had relied on those representations. Further, the court held that the bank could not rely on its standard term to the effect that it was acting on an execution only basis because, based on the wording of the term, it applied to higher risk investments; not lower risk investments of the type in question. It is worth noting that the plaintiff was not looking for high risk; nor was he looking to trade his investments. Rather, he was a balanced investor looking for some capital appreciation and the bank’s representatives appreciated this as part of his customer profile.
Therefore, the bank did assume a duty of care towards the plaintiff and had a duty to exercise reasonable care and skill.
The court also held that the bank was unable to rely on the exemption clauses in its standard terms because they failed to satisfy a test of reasonableness.24
Ultimately, however, the plaintiff’s claim failed because the court considered that the bank’s representatives had not been negligent. They had relied on the audited financial statements prepared by (among others) the auditors of the hedge fund and were entitled to do so, in the absence of any anything untoward.
There is no appeal in Li Kwok Heem. It is a rare example in Hong Kong of a claimant investor managing to establish an advisory duty on behalf of a bank with respect to an investment with a third party, albeit ultimately in vain. It is important to stress that the plaintiff was not a high risk investor.
Going forward, the “fiction” whereby some banks make recommendations as to clients’ investments, but seek to rely on their acting on an execution only basis, will shortly come to an end in Hong Kong. The Securities and Futures Commission (SFC) in Hong Kong has mandated that by 9 June 2017 all financial intermediaries governed by its Code of Conduct must include a new “suitability clause” in all client agreements. The expectation is that financial intermediaries will do this before that date. The new clause includes a “non-derogation” provision. This will be complemented by a new provision in the Code of Conduct that will provide that a financial intermediary may not include in a client agreement any provision which is inconsistent with its obligations under the Code or which misdescribes the actual services to be provided to a client.25