The English Court of Appeal’s unanimous decision in Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184 (Rubenstein) suggests that financial advisers will be held to an increasingly high standard in relation to the provision of financial advice, particularly where there is a failure to take account of the investor’s personal objectives, financial situation and needs.

Rubenstein suggests that losses suffered as a result of issues with the investment itself will likely be within the scope of the adviser’s liability, even if they occur as a result of market turmoil or other extraneous factors. It is possible that the future of financial advice reforms recently implemented in Australia will be interpreted in a similar manner – increasing the potential scope of a financial adviser’s liability for losses suffered as a result of their advice.


In 2005, Rubenstein wanted to safely invest the proceeds of the sale of his home pending the purchase of another property. Rubenstein wanted to find an investment which ideally provided a higher rate of interest than a standard bank deposit, but he told his financial adviser that he could not risk his capital at all. Rubenstein informed the adviser that it was unlikely that the funds would be invested for more than a year. However, he did not find another property to purchase, and the funds were invested for three years. In 2008, Rubenstein suffered financial loss on his investment as a result of the collapse of Lehman Brothers in the global financial crisis.

Rubenstein sued HSBC for breach of statutory duty, in contract and tort. The trial judge found that HSBC was negligent and had breached various statutory duties. However, his Honour held that the loss was not caused by HSBC’s negligence or breach of duty – it was caused by unprecedented market turmoil which was unforeseeable and too remote to allow Rubenstein to recover.

On appeal, HSBC argued that it had no duty which extended beyond Rubenstein’s own projection that he would be unlikely to need the investment for more than one year. At the time the investment was made in 2005, the projection would have been that any risk associated with the investment was minimal. Therefore, any losses suffered three years later (particularly in light of the extraordinary event of the global financial crisis), were beyond the scope of HSBC’s liability.

The Court of Appeal unanimously upheld the trial judge’s finding that HSBC was negligent and had breached various statutory duties. However, the Court of Appeal reversed the trial judge’s findings in relation to foreseeability and remoteness. The Court of Appeal found that in light of the objects and purpose of the statutory provisions (consumer protection), it is reasonably foreseeable that if a financial adviser:

  • misleads a client as to the nature of its recommended investment; and
  • puts its client into an investment which is unsuitable when they could have just as easily put the client into something that is more suitable,

the financial adviser could be liable for loss resulting from the investment. In circumstances where the financial adviser is not only obliged to avoid injuring his client, but to also protect him from the particular loss which has come about, the scope of the adviser’s duty may extend to even unusual events, which will not be considered too remote.

Failure to consider the client’s objectives, financial situation and needs

In refusing to allow any scope for “professional margin” in the adviser’s judgment, the Court of Appeal held (at [90]):

The question is not one of risk in the abstract, but of suitability for the customer. The judge was right to conclude that “the structure of the investment was materially different [from cash deposited] and the risk was commensurately greater”, and that Mr Marsden was negligently wrong to suggest that the [financial product] was the same as a cash deposit and to make no attempt to consider the other funds…as an alternative…It might be possible to say that both a deposit with HSBC and an investment in [the fund] were without risk (either in the abstract or compared with other possible investments), but the question is whether the deposit and the investment were equally suitable for Mr Rubenstein. The very fact that [the fund] yielded materially more than [a different fund] or a cash deposit demonstrates how the market priced the difference in risk.

Scope of the adviser’s duty

The Court of Appeal found that although Rubenstein suggested that a new home would probably be purchased within a year, “the indication given was nevertheless ultimately an indefinite one, namely until a new home was bought”, and because the adviser represented the investment as equivalent to a cash deposit, he informed Rubenstein that “it is unlikely that you will need further advice”. On that basis, the adviser could not afford to render his advice on the basis that the current outlook for market conditions looked fair – he ought to have realised that the investment may have been made for an indefinite period of time.

The Court of Appeal found (at [103]):

  • an investment adviser who recommends a particular investment may be responsible if some flaw in the investment turns out to materially contribute to some investment loss;
  • if the investment goes wrong, there will almost always be other causes (including bad management, market turmoil, fraud or political change), but it will be a question of legal judgment as to whether the change is “so extraneous to the validity of the investment advice as to absolve the adviser for failing to carry out his duty or duties on the basis that the result was not within the scope of the duties.”

The Court of Appeal’s decision appears to turn on the question of whether the loss was caused by an issue with the suitability of the investment itself. In Rubenstein, the investment soured because it was structured in a way (at [112]):

which exposed Mr Rubenstein to the very risk (of loss of capital by reason of market movements) which he had wanted to avoid by investing, as he was led to believe he had, in a safe investment equivalent to a cash deposit.

In the context of considering the scope of the investment adviser’s liability, the Court of Appeal noted (at [115]):

Unfortunately, the trial judge’s findings establish that Mr Marsden understood neither the client that he was advising, nor the product he was recommending. He did not even understand that he was advising, as distinct from merely executing his client’s instructions. He failed therefore to undertake the standard statutory procedures designed to assist the parties to a satisfactory transaction. He misled his client, by omission and commission, into thinking that he had invested in something which was the same as cash. This is not, to my mind, a promising context in which to find that a loss suffered as a result of following a recommendation to enter into an unsuitable investment, when that loss came about because of the very factor which made the investment unsuitable (namely its inherent susceptibility to risk from market movements) was too remote to be recovered from the defaulting advising bank.

The Court of Appeal affirmed the trial judge’s finding that HSBC had breached a number of procedural and substantive sections of the UK Financial Services Authority’s Conduct of Business Rules (COB). The Court of Appeal acknowledged that although the underlying principles of causation, forseeability and remoteness of damage in such practice rules may be the same as in the law of tort or contract, they may operate in different ways. Accordingly, the applicable principles in tort and contract “will be guided by the focus and purpose of the statutory provisions” in the COB rules – i.e. consumer protection.

Key points

Rubenstein suggests that the future of financial advice reforms may have similar consequences for Australian financial product advisers. That is, where a statutory regime is implemented to protect the interests of retail clients, the scope of an adviser’s duty may be extended. Professional indemnity insurers should monitor developments in this area.