Rubenstein v HSBC Bank Plc [12.09.12]
Court of Appeal overturns controversial High Court decision on causation in claim by consumer concerning negligent financial advice.
In August 2005, Mr Rubenstein sought to invest the proceeds of the sale of his home while he searched for a new property. He informed HSBC that he wanted an investment that would:
- Be liquid, so that he could buy a new property at short notice
- Provide higher interest than a standard deposit account
- Involve no risk at all to his capital investment
On their advice, he invested £1.2 million in a bond that invested in a range of assets. He was still invested in 2008, when the market turmoil began. He tried to withdraw his investment but was unable to do so due to a moratorium and, ultimately, lost close to £180,000, which he sought to recover from the bank.
At first instance, the court had found that, although the bank had given negligent advice that there had been no risk to his capital and he had relied on that advice, Mr Rubenstein’s loss had not been caused by that advice but by "unprecedented market turmoil", including a run on the provider of the bond. The loss was not recoverable from the bank, as it had not been foreseeable and was too remote. Accordingly, Mr Rubenstein was awarded only nominal damages in contract. He appealed.
The Court of Appeal allowed the appeal. It found that Mr Rubenstein had expressly instructed the bank that he required an investment that would protect him from market forces and the loss arose precisely because the bank had failed to recommend such an investment. The Court of Appeal also played down the importance of wider events, finding that a fall in the value of the investment had indeed been foreseeable, not least because that risk was mentioned in the product literature. Therefore, there had been no new unforeseeable event between the advice given and the loss; the advice had caused the loss. It was also held to be irrelevant that the loss caused by market forces was larger than might have been foreseen.
The Court of Appeal found that the individual adviser at the bank had not known himself that the investment had been riskier than a deposit account and that the bank had clearly breached its duties to the investor. They noted that, from the bank’s perspective, that is not a good starting point for a denial of liability.
Many similar claims are dealt with by the Financial Ombudsman Service (FOS). The court effectively endorsed a recent FOS decision based on similar facts; that it was "fair" that an adviser should pay all losses incurred, as the investors would not have invested at all if they had not received the negligent advice.
The judgment also emphasises the importance of ascertaining the scope of the instructions to the adviser. In this case, it was held that the bank had been required to guard against the risk of market forces affecting the value of the underlying assets. If an investor was negligently advised about the market risks associated with a product, it will be no defence that a market fall caused a greater loss than could reasonably have been foreseen at the time of investing.