In the High Court case of Rubenstein v HSBC [2011] EWHC 2304, the judge found that although the IFA was negligent and in breach of COB rules in advising the claimant to invest in the AIG Premier Access Bond, the IFA was not liable for the investment losses. The losses were caused by the run on AIG in 2008, but it was held that was not reasonably foreseeable when the advice was given in 2005. The case also provides useful guidance on when an IFA will be deemed to have given investment advice, rather than purely factual information.

Facts

The claimant, Mr Rubenstein, was a retail client of HSBC. In August 2005 he telephoned his local branch about investing the sum of £1.25m. He wanted to fi nd a temporary income-earning investment for this money, which was to be used to purchase a new home. HSBC’s IFA emailed him 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 Enhanced Fund”). The equivalent interest rate for the Enhanced Fund was 5.56%, 48% higher than for HSBC’s premier deposit account. The other fund within the bond was the Standard Variable Rate Fund (“the Standard Fund”), which had a lower equivalent interest rate than the Enhanced Fund, and was slightly lower risk.

On 24 August 2005 Mr Rubenstein emailed the IFA stating:

“We can’t afford to accept any risk in the investment of the principal sum. Can you confi rm what – if any – risk is associated with this product”.

He received a reply from the IFA that day:

“We view this investment [the Enhanced Fund] as the same as cash deposited in one of our accounts…[T]he risk of default…is similar to the risk of default of Northern Rock”.

In September 2005 Mr Rubenstein invested his £1.25m in the Enhanced Fund.

In September 2008 the run on AIG occurred, triggered by rumours AIG in the US was about to go bankrupt. AIG suspended redemptions from both the Enhanced Fund and the Standard Fund as it sought to liquidate their assets in order to meet all of the investors’ requests. Mr Rubenstein was eventually able to withdraw his money in November 2008. He received £179,530.17 less than the original £1.25m invested.

Mr Rubenstein alleged he received negligent advice from the IFA, and that had he been advised properly he would have placed his £1.25m in a deposit account over the same period (and would have received back the full £1.25m plus interest).

The AIG Premier Access Bond

Both the Enhanced Fund and the Standard Fund were marketed by AIG as providing attractive returns to cautious investors, who might otherwise place their money in high interest bank accounts. The Enhanced Fund was the less cautious of the two funds, due to diff erences in the types of asset each held. The Standard Fund only invested in or purchased debt from fi nancial institutions with a minimum credit rating of AA. The Enhanced Fund invested in or purchased debt from fi nancial institutions with a minimum rating of A, and its assets were less liquid.

With both funds, investors such as Mr Rubenstein purchased units, the value of which at any given time depended on the value of the funds’ underlying assets. AIG was not under any obligation to return to investors the value of the principal sum invested.

Was advice given to Mr Rubenstein or did HSBC just pass on factual information?

HSBC argued its IFA simply passed on information to Mr Rubenstein regarding the Enhanced Fund and did not recommend it to him.

The judge rejected this. He noted that “Mr Rubenstein began by asking for a recommendation. He wanted to know what [the IFA] could suggest as a short-term home for his money, involving no risk to the capital and providing a better rate of return than [deposit accounts]”.

In response to this enquiry, the IFA put forward the Enhanced Fund, but without a “disclaimer” to the eff ect that no advice was being given. The absence of such a disclaimer meant the IFA was necessarily advising that the Enhanced Fund “met the criteria” outlined by Mr Rubenstein.

In this case the IFA had passed on information, but crucially in doing so without a disclaimer that no advice was being given he had implicitly given advice, since the information was supplied in response to a request for a recommendation. In the circumstances, the information provided acquired the character of a recommendation.

The judge also held that in saying to Mr Rubenstein, “[w]e view this investment as the same as cash deposited in one of our accounts”, he was implicitly advising Mr Rubenstein that that was the case.

The judge provided useful guidance on what would generally constitute advice as opposed to merely providing factual information, which is worth noting:

“[T]he starting point of any inquiry as to whether what was said by an IFA in a particular situation did or did not amount to advice is to look at the inquiry to which he was responding. If a client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer to the eff ect that advice is not being given. On the other hand, if a client makes a purely factual inquiry such as “What corporate bonds are currently yielding X%?” or “How does this structured product work?”, it is not diffi cult to conclude that a reply which simply provides the relevant information is no more than that…

“The test is an objective one. It is irrelevant whether [the IFA] thought he was only providing information or whether [the client] thought he was being given advice. The question is whether an impartial observer, having due regard to the regulatory regime and guidance, and to what passed between the parties, would conclude that advice had been given”.

Advice was given – but was it negligent?

The judge held that negligent advice was given to Mr Rubenstein:

  • Mr Rubenstein had expressly stated he wanted no risk to capital. The judge interpreted this as meaning “the minimum possible risk” as opposed to no risk at all. But nonetheless this should have prompted the IFA to consider and recommend the Standard Fund rather than the Enhanced Fund (as it was lower risk); 
  • The advice that an investment in the Enhanced Fund was the same as a cash deposit was wrong. The only risk faced by a depositor of cash at a bank is that the bank may itself fail. A bondholder/investor in the Enhanced Fund not only took the risk that AIG might fail but also a risk that the value of his units could fall (in which case he could get back less than he put in).
  • The failure to consider and recommend the Standard Fund constituted a breach of COB 5.3.5(2)R (suitability). The failure to explain to Mr Rubenstein that he could get back less than the capital he put in was a breach of COB 5.4.3R (requirement for risk warnings).

Did Mr Rubenstein rely on the advice?

The judge accepted Mr Rubenstein’s evidence that, “although he was not insisting that his capital should be ring-fenced, he was looking for an investment which posed the minimum possible risk to the capital”. He held Mr Rubenstein relied on the advice he was given “as providing reassurance that the Enhanced Fund met that requirement” and that, but for that reassurance (which was negligent), he would not have invested in the Enhanced Fund. It was not relevant to the question of reliance that Mr Rubenstein understood the key features of the Enhanced Fund. The crucial point for the judge on reliance seems to have been his acceptance of Mr Rubenstein’s evidence that “he did not understand that his capital might be at risk because a large number of investors wanted to withdraw their funds”. It was this that was the direct cause of the loss – see below.

Did the advice cause the loss?

This is where Mr Rubenstein’s claim failed.

The judge considered the scope of the IFA’s duty was to “consider all the potential consequences of the suggested investment being made” and that, since the suggestion was negligent, HSBC could be held “liable for all the foreseeable loss caused by making that investment”.

It was not disputed that the direct cause of Mr Rubenstein’s loss was the early liquidation of the Enhanced Fund’s assets, caused by the run on AIG, not the structural diff erences between an investment in the Enhanced Fund and a cash deposit that the IFA had negligently glossed over.

The question therefore became: was “the concept of a run on AIG…so remote that no fi nancial adviser would have been required to point it out”. The judge agreed that was the case. This meant the losses claimed by Mr Rubenstein were too remote to be recovered against HSBC in law (whether in contract or tort). It also meant the losses could not be said to have been caused by the IFA’s negligence, because the chain of causation was broken. The cause of the loss was the run on AIG, which could not reasonably have been foreseen in 2005.

The judge held the position was no diff erent in relation to the breaches of COB 5.3.5(2)R (suitability) and COB 5.4.3R (requirement for risk warnings), as the measure of damages under s.150 of FSMA was the same as in tort and contract. In other words, Mr Rubenstein needed to prove that the losses were caused by the COB breaches and were not too remote, which he was unable to do.

Other points to note

 At the outset of his judgment the judge sounded “a word of caution” that his decision should not be viewed as having general application. However, his sweeping conclusion that the turmoil which enveloped AIG in September 2008 was not reasonably foreseeable by IFAs in August 2005 is, by its nature, one of general application, and of real benefi t to the market in connection with credit crunch losses. The same logic can and arguably should be applied to other key credit crunch events, such as the collapse of Lehman Brothers. Of course, the closer in time the advice was to the loss caused by the particular event, the more likely it is that the event (and with it the loss) will have been reasonably foreseeable.

  • The judge considered what the measure of damages would have been had the loss not been too remote and caused by the IFA’s negligence. He agreed the measure of damages was the diff erence between what Mr Rubenstein received back from his investment and what he would have received “if his money had been invested in a more capitally secure environment”. The judge took that environment as being “more than one deposit account with 3 month notice terms”.
  • The judge would not have reduced his damages for contributory negligence (the allegation being Mr Rubenstein should have asked questions about the risk); he held “it would [be] going too far to apportion blame to a client…[for] not probing deeper into the workings of the product he is recommended, once he is told that the risk of investing in it is the same as a cash deposit”. The bank had originally run a failure to mitigate argument (because Mr Rubenstein had pulled his money out thereby losing the opportunity that the investment would “turn around”), but this was abandoned at the trial.
  • The judge’s analysis on remoteness / causation will not bind FOS (IFG v Jenkins [2005] EWHC 1153), and so the decision off ers only limited comfort to fi rms facing similar mis-selling complaints. We must wait to see what (if any) impact the case has on FOS’ treatment of such complaints before the Ombusdman. There is a real possibility that had Mr Rubenstein used FOS he would have recovered the maximum £100,000 and received a recommendation that HSBC pay the balance of his losses.
  • The FSA has now fl oated the idea of amending s. 150 of FSMA so as to create in eff ect strict liability by making fi rms liable to compensate clients for breaches of COBS even if they did not cause the loss.

Under the changes to the law envisaged by the FSA, Mr Rubenstein would have recovered in full (for the breaches of COB 5.3.5(2)R and COB 5.4.3R notwithstanding that his claim failed because of the current law of causation.