On 4 October 2011, Teare J handed down his judgment in Zaki & Ors v Credit Suisse (UK) Limited (“CSUK”). The case highlights the stark diff erence between (i) the issue of when a bank is liable for advice/recommendations under the Conduct of Business Rules (“COB”) and (ii) whether the same sort of advice and recommendation gives rise to liabilities at common law.

The claim was brought by Mr Mohamed Magdy Zeid, along with his wife Mrs Soheir Ahmed Zaki, and two daughters who were joint account holders with him. Between 2003 and September 2008, Mr Zeid had purchased 39 structured products from CSUK (or its predecessor Credit Suisse First Boston (“CSFB”)). During that same period Mr Zeid had also bought structured products from other banks, including Barclays and Citibank.

The claim was advanced in relation to 10 notes that CSUK sold to Mr Zeid between February 2007 and June 2008. All of the 10 notes were leveraged (ie bought with the assistance of loans) and none of them were capital protected. Of the 29 previous products purchased by Mr Zeid from CSUK (or CSFB), 14 were capital protected and 15 were not capital protected.

In October 2008, CSUK issued a margin call. Mr Zeid did not transfer the required additional collateral and CSUK liquidated the 10 products in issue in the claim causing Mr Zeid to suff er a loss of $69.4 million.

Mr Zeid claimed that CSUK had breached its statutory duty to comply with COB, in particular its duty under COB 5 to ensure that any personal recommendation given was suitable for him. Section 150(1) of the Financial and Services Markets Act 2000 provides that:

“A contravention by an authorised person of a rule is actionable at the suit of a private person who suff ers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.”

By the end of the trial there was no dispute that Mr Zeid was to be considered as a “private customer” for the purpose of COB. The fundamental issues in dispute were whether (i) CSUK made a personal recommendation to Mr Zeid to purchase the notes and (ii) if yes, whether it took reasonable steps to ensure that its advice was suitable for Mr Zeid.

Personal recommendations

There was a factual dispute as to whether CSUK made a personal recommendation to Mr Zeid to purchase the 10 notes in question.

A recommendation is defi ned as “advice on the merits” of buying a particular investment. The judge considered that advice on the merits must refer to the advantages and disadvantages of purchasing the notes. However, advice on the merits is to be distinguished from the mere giving of information . Further guidance is provided in the FSA’s Perimeter Guidance Manual at paragraph 2.7.15:

“…the context in which something is communicated may aff ect its character; for example, if a person gives information on share price against the background that, when he does, that will be a good time to sell, then this will constitute advising on investments.”

Mr Zeid himself died before a draft statement or proof of evidence had been prepared and there was no evidence from him. As for Mr Zeid’s daughters and wife, the judge held respectively that their evidence should be treated with caution and that she had little relevant evidence to give.

Mr Mahmoud Zaki (no relation of Mr Zeid’s wife, Mrs Zaki), a relationship manager employed by Credit Suisse on the Middle East desk, gave evidence on behalf of CSUK.

Mr Zaki’s evidence was that he would explain the notes to Mr Zeid in detail, including the risks associated with the notes and the eff ect of leverage on such risks. The conversations were described as “two-way” but Mr Zeid would decide what trades to execute.

The judge’s impression was that Mr Zeid had “his own ideas as to what he wanted, examining critically the notes off ered to him by Mr. Zaki and suggesting changes to the notes offered to reflect his wishes”.

However, Mr Zaki’s role was to sell products to Mr Zeid and the judge considered it unrealistic to suppose that he did not, at least from time to time, cross from the territory of information into the territory of recommendation or advice. The judge also relied on an internal CSUK note recording Mr Zaki advising against a purchase on the grounds of shortfall:

Although this was advice against rather than for a transaction it is, I think, unreal to suppose that Mr. Zaki scrupulously avoided giving advice as to the merits of a transaction and restricted himself to providing information, save when advising against a purchase.”

Accordingly, the judge held that, on the balance of probabilities, Mr Zaki made recommendations to Mr Zeid to purchase each of the notes.


CSUK having made personal recommendations, under COB 5.3.5 it was under a duty to take reasonable steps to ensure that the notes were suitable for Mr Zeid.

COB does not specify the factors to be taken into account when assessing suitability. However, the judge held that the three factors set out at rule 9.2 of the Conduct of Business Sourcebook Rules (which replaced COB from 1 November 2007) were relevant:

  • The client’s knowledge and experience in the investment fi eld relevant to the investment.
  • The client’s fi nancial situation. 
  • The client’s investment objectives.

Mr Zeid was described as a very successful businessman whose interests and responsibilities extended into fi nancial services and banking. For example, he was on the Board of Sigma Capital which had an investment banking role.

The judge also considered that Mr Zeid understood the essential characteristics of the notes, including the circumstances which might lead to margin calls and the fact that his capital was at risk, and was able to form a view as to how the markets were likely to perform and, consequently, the risks he ran in holding the notes.

As regards his fi nancial situation, Mr Zeid’s family wealth in 2007 was not less that $600- 700 million and there was no suggestion that he was unable to bear the risks associated with the notes.

In relation to Mr Zeid’s investment objectives, the judge considered that his aim was to receive an enhanced or high coupon payment (he had a desire for “double digit” returns) and if that led to the purchase of a non-capital protected note then that was a risk he was prepared to take.

In light of the above, the judge considered that there was nothing which would suggest that Mr Zaki’s recommendation or advice to buy the notes was not suitable for Mr Zeid. The notes provided him with the enhanced return that he was looking for and he understood that there was a risk that he might not recover his capital.

However, notwithstanding Mr Zeid’s appreciation of the risks and his ability to bear the consequences of them materialising, the judge considered that a line had been crossed in May/June 2008. By this time Mr Zeid’s account was already particularly exposed to the volatile equity market because of a lack of diversifi cation. It was held that the notes entered into at this time were unsuitable and that a prudent adviser would have recommended that Mr Zeid reduce his exposure to equities. Accordingly, CSUK was in breach of its statutory duty.


Although Mr Zeid ultimately lost on causation, this decision will be welcomed by private banking clients. It seems to be generally accepted for all purposes that the sales process will, as a matter of fact, generally involve the giving of advice and the making of recommendations. At common law, there currently appears to be a presumption that such investment advice, when given as part of the sales process, will not generally give rise to a duty of care in respect of such advice absent, for example, an advisory agreement. However, under the statutory regime this case also recognises that salesmen will always, at some point, cross from the territory of information into the territory of recommendation or advice but that a bank will be liable for such advice/recommendations to a private customer under the FSA Rules if it is unsuitable.

This leads to the odd conclusion that Mr Zeid, a man of great wealth and no little sophistication, can make a claim under section 150 of FSMA but would not have been able to do so if he had opted instead, simply for tax purposes, to invest through a holding company. It seems odd that a bank’s liability for exactly the same advice should be so radically altered on the basis of how a client decides to structure the way in which it invests.

This decision will nevertheless provide comfort to investors in relation to suitability. In this context, it is not open to banks to rely simply on the sophistication of clients and/or the fact that a client has adopted an aggressive investment strategy. The court will instead take all factors into consideration, including market volatility and the client’s portfolio of investments with the bank in question, in considering whether the bank had taken reasonable steps to ensure that the product was suitable.

It is also worth noting that some of the notes in issue were structured capital at risk products (“SCARPs”). The FSA has recently fined Credit Suisse £5.95 million for selling £1 billion worth of SCARPs to private banking clients without making sure the sales were suitable and properly explained. The FSA’s criticisms are echoed in the judge’s comments in this case. It is to be expected that Credit Suisse will face further litigation in this respect.