Back in September 2011, we reported on Rubenstein v HSBC, a case that generated significant interest in the financial services community as it concerned the scope of the duty of care when it came to the giving of investment advice to a consumer.

The decision of HHJ Judge Havelock-Allan QC (sitting as a High Court judge in the Mercantile Court in Bristol) was then appealed to the Court of Appeal; the Court of Appeal handed down its decision on 12 September 2012.

Readers will recall that HHJ Havelock-Allan found as a matter of fact that HSBC had negligently advised Mr Rubenstein in recommending an investment in the Premier Access Bond provided by AIG (the “PAB”). Despite his finding on the facts however, the judge awarded only nominal damages to Mr Rubenstein on the basis that his loss was not caused by the advice but instead by the “extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman Brothers”. He therefore held that Mr Rubenstein’s loss was unforeseeable and was too remote to award him anything more than nominal damages.

Mr Rubenstein appealed on the basis that the judge was wrong to conclude that no loss had flowed from the negligent advice, or the established breaches of the FSA’s rules.

The appeal was heard by Lord Justices Rix, Lloyd and Moore-Bick, who upheld Mr Rubenstein’s appeal on remoteness, with Rix LJ delivering the Court’s unanimous judgment.

The issue of causation turned on the facts of the advice provided by HSBC and the nature of the investment that was recommended to Mr Rubenstein.

HSBC had recommended an investment that, although rated as a cautious investment, was still exposed to market losses (given the range of funds featured in the PAB), that Mr Rubenstein had specifically advised that he wished to guard against market risk and could afford no loss to his capital and crucially, the advice to Mr Rubenstein that the PAB was “…the same as cash deposited in one of our accounts.”

In reaching its conclusion the Court of Appeal affirmed the decision at first instance that the advice was negligent and misleading as Mr Rubenstein had not been advised that his investment was in fact, exposed to market fluctuations. In fact, the only risk warnings that were given were in respect of the default of AIG, which at the time the investment was made in 2005, was inconceivable.

However, the Court of Appeal overturned the decision regarding the foreseeability and remoteness of the loss and awarded Mr Rubenstein damages.

This was on the basis that Mr Rubenstein’s losses flowed from the fact that, despite his avowed wish to avoid risk to his capital from fluctuating markets, he was recommended the PAB which was subject to risks associated with market conditions and this was not the same as a cash deposit.

The Court of Appeal found that HHJ Havelock-Allan had erred in finding that the losses flowed from the unforeseeable collapse of Lehman Brothers. Rix LJ said that “the correct selection of the cause of Mr Rubenstein’s loss was the loss in value of the assets in which the EVRF [the PAB] was invested”.

The central aspects of the Court of Appeal’s judgment were that:

  1. Mr Rubenstein had specifically wished to guard against exposure to market fluctuations;
  2. The PAB was therefore inherently unsuitable as it was exposed to market risk and it’s safety depended on the “financial weather”;
  3. Mr Rubenstein was told that the investment was as safe as a cash deposit which was incorrect; had the Bank warned him that this was not the case (as it should have done) then Mr Rubenstein would have sought further advice or not gone ahead with the PAB investment at all; and
  4. HSBC could have recommended a similar investment which invested in more conservative assets and was therefore of a lower risk.
  5. The risk of market movement on the value of an investment of a type that Mr Rubenstein did not even realise he was committed to was exactly the risk which caused his loss
  6. Mr Rubenstein’s loss was therefore not too remote from the advice provided by the Bank.

On the face of it, this isn’t helpful for advisers. However, the good news is that it is likely that the Court of Appeal’s decision can be distinguished. The judgment therefore is only likely to be of direct relevance going forward where similar facts as to an adviser’s conduct, the scope of advice and the particular investment are all made out.