Chang Pui Yin and Ors v Bank of Singapore Ltd  HKCU 1858
Since the 2008 global financial crisis, there have been a number of unsuccessful lawsuits by disappointed investors against their banks for mis-selling financial products, breach of duty of care, or misrepresentation. Individual plaintiffs have failed, in the main, because the Courts have not accepted that they were misled or unaware of the financial risks involved. For example, Judge Reyes in Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA  HKCU 1320 described the investor as "an adult, not a child…Ms Kwok is (and was) perfectly capable of understanding the key terms of the Statement." This recent case of Chang Pui Yin and Ors v Bank of Singapore Limited  HKCU 1858, represents the first significant victory for customers of a bank in a mis-selling case.
On 8 August 2016, the Court of First Instance decided that the relationship manager at the defendant bank had breach her contractual duty towards the bank's private banking clients by failing to exercise "reasonable care and skill" in assessing the clients' investment objectives and risk appetite, in offering them unsuitable investments, and in failing to warn of applicable risks.
According to the judgment, Mr and Mrs Chang (the "Changs") led relatively simple lives until 1997, when Mr Chang received a 'huge windfall' of HK$120 million from his connection with a relative's family business. The newly wealthy couple retired back to Hong Kong. Mrs Chang had bank accounts with Standard Chartered Bank ("SCB") during 1997-2004 and became good friends with Ms Yvetti Chau, customer relationship manager ("RM") of SCB. The RM moved to the defendant bank in 2004 ("Bank"), formerly ING before it was acquired by Bank of Singapore in 2009. Mrs Chang opened a private banking account with the RM and the Changs risk profile was classed as "medium risk" by the Bank.
The Changs and Nextday International Limited ("Nextday"), an investment vehicle of Mrs Chang, were sold high-risk investment products, including accumulators, equity-linked notes, foreign currency options and forwards, high yield bonds and equity options. These investments suffered significant losses as a result of the 2008 financial crisis. The Changs and Nextday claimed damages against the Bank for breach of contract, negligent advice, misrepresentation and/or undue influence in relation to their investments made through the Bank.
The plaintiffs' case was that pursuant to the banking agreement, the Bank would ascertain the financial circumstances and investment objectives of the plaintiffs; and then give investment advice and recommendations with reasonable care, skill and diligence in accordance with those circumstances and objectives.
In line with the history of bank mis-selling cases, the Bank argued that there was no duty to advise under the standard disclaimers and non-reliance clauses in the account opening forms, service agreements, risk disclosure statements and that the Bank should not be "…responsible for the accuracy or completeness of any recommendation or information it may communicate to the client."
Court of First Instance Decision
The Court found in favour of the Changs and held that the Bank was in breach its contractual duty of care towards them by advising and recommending that they invest in products which did not match their investment objectives, and by failing to warn the Changs of the risk inherent in the investments offered to them.
Judge Bharwaney explained that the investors were "elderly and unsophisticated" and "wholly different from the vast majority of plaintiffs pursuing their private bankers in our courts" in that they "had very little real understanding about the investments they had made through the Bank".
On the basis of the transcripts of a conversation between Mrs Chang and the RM about the purchase of a high risk Russian bond issued by Russian Standard Bank JSC, the Court found that the RM never explained to Mrs Chang the risks or features of the product but only assured Mrs Chang that she should "just sit still and collect the money."
The Court considered whether the Bank agreements gave rise to a requirement to provide advisory services, or if they were "execution only". A clause governing the scope of the banking services stated that "investments will be directed by you in the case of Custody Accounts (Custody Accounts) and Accounts which are established on an advisory basis only (Non-Discretionary Accounts)." The Court found that the expression 'established on an advisory basis only' suggested that the Bank was providing an advisory service (and not "execution only" services).
Having established an advisory duty, the Court relied on an earlier case of Susan Field v Barber Asia Ltd HCA 7119 of 2000, to establish that the RM had breached a contractual duty of care owed to the customer by failing to exercise reasonable care and skill by (1) not ascertaining and having regard to the Changs' investment objectives and risk appetite (2) not offering products which were suitable to the Changs' investment objectives and risk appetite and by (3) not warning the Changs of the risks inherent in the investments that were being offered.
This case demonstrates that the Courts are now prepared to hold banks accountable for negligent or misleading advice in situations where the customers genuinely rely upon banks to provide investment advice. Notwithstanding that the Bank had other non-reliance clauses and disclaimers in the service agreements, the Court interpreted an ambiguous clause within the Bank's standard terms and conditions against the Bank, and determined that the relationship between the Changs and the Bank was advisory in nature.
In assessing the level of sophistication, the Court will look at a range of factors, including the customer's education, personal background, investment experience, tape recordings of communications between the client and the Bank, and financial expert witnesses.
Banks will no longer be able to rely on non-reliance clauses to create a contractual estoppel and limit the duties owed to the investor. It will be important for banks to carefully document their suitability obligations as a defence against future mis-selling claims.
For further Alerts regarding mis-selling this year, please refer to our February 2016 Financial Services Alert.