Zaki & ors –v- Credit Suisse (UK) Limited  EWCA Civ 14
The Court of Appeal has confirmed that the trial judge had not erred in his application of the suitability of investment advice under the FSA’s Code of Business Rules. The investment advice and arrangement of lending provided by Credit Suisse was suitable for the customer and this could not be rendered unsuitable by an immaterial breach of procedural duty.
The appeal, and underlying claim, concerned the suitability of structured financial products, which were allegedly mis-sold to Mr Zeid.
Mr Zeid, a successful and experienced businessman, had bought structured products from Credit Suisse, with the assistance of loans obtained from an associate of Credit Suisse. Further to the financial crisis in October 2008, Credit Suisse issued a margin call which was not met by Mr Zeid. Credit Suisse therefore liquidated the products, causing a loss of US$69.4million.
Mr Zeid issued a claim for damages, pursuant to section 150 of the Financial Services and Markets Act 2000. The claim was based on breach of duty under the relevant FSA Code of Business Rules (“COB”, as they then were), which imposed duties on Credit Suisse as regards the suitability of the products for Mr Zeid as a “private customer”. COB r.5.3.5 obliged a firm to take reasonable steps to ensure that its investment advice was suitable for the client. COB r.7.9.3 prohibited a firm from lending (or arranging to lend) unless it had assessed the client’s financial standing, based on information they disclosed to the firm, and taken reasonable care to ensure that the arrangements for the loan of the money in connection with the investment, and its amount, were suitable for the transaction.
The judge at first instance dismissed the claim, finding (in respect of the notes which formed the subject of the appeal) that the advice given by Credit Suisse had been suitable for Mr Zeid. The claim in respect of r.7.9.3 was also dismissed, on the basis that the rule dealt with the suitability of a loan at the time it is granted, not when it was drawn down.
The Claimants appealed on the basis that: the suitability tests under r.5.3.5 and r.7.9.3 were not the same; the judge had erred in setting aside further consideration of COB r.7.9.3; in deciding it only applied to the facility arrangements and not the investments; in failing to apply its terms and procedural requirements to the question of suitability of the investments; and in failing to recognise that due to the prohibitive language of r.7.9.3, Credit Suisse was in breach of its statutory duty having lent whilst not in strict compliance with the rule’s requirements.
The Court of Appeal agreed with the trial judge that the language of r.7.9.3 did not require Credit Suisse to have control over the grant of the facilities, and therefore did apply in the type of situation found in this case, where the bank had arranged lending through an associate. Were this not the case, groups of companies could seek to avoid their COB responsibilities simply by relying on group structure complexity.
However, the Court of Appeal saw no reason in the wording of r.7.9.3, or in principle, practicalities or good sense, to limit the arrangements concerned to those of one kind or another. The facilities in this case were expressed in the most general terms, and the judge at first instance had been wrong in his hypothesis that the rule was only concerned with the grant of the overarching facility agreements and not the draw downs to finance the individual transactions. COB r.7.9.3 was therefore engaged by the transactions.
The Court then turned to the issues concerning the interpretation of r.7.9.3 by the first instance judge.
While the trial evidence indicated that Credit Suisse had never interrogated Mr Zeid as to his net worth - and therefore had the judge considered r.7.9.3 he might have found some element of breach - it also revealed that Credit Suisse’s estimate of Mr Zeid’s net worth was too conservative. There could be no fault in those assessments being too conservative. The Court of Appeal was not prepared to make any finding contrary to that of the trial judge, to the effect that the bank failed in its r.7.9.3(1) responsibilities to make a proper assessment of Mr Zeid’s financial standing.
The Court confirmed that the rules were an attempt to hold a fair balance between the need to protect investors from ignorance, or even themselves, and the need to permit the properly informed investor ultimate autonomy to make and take responsibility for his own mistakes. Where it is ultimately found that personal recommendations or lending arrangements are suitable, they cannot then be rendered unsuitable by some incidental and essentially immaterial failure of form.
The requirement of r.7.9.3(2) to take reasonable steps to ensure that the lending arrangements were suitable is a narrower suitability test than that of r.5.3.5. Where a personal recommendation is made, the r.7.9.3(2) test will be subsumed in the r.5.3.5 test, at any rate where the personal recommendation is found to be suitable (as in this case). The trial judge’s findings in respect of r.5.3.5 could not therefore be undermined by a submission that he applied the wrong test.
The appeal was therefore dismissed.
The interesting point raised by this judgment is that a failure of procedure in assessing a customer’s financial standing under r.7.9.3, will not necessarily result in a breach of statutory duty if the bank then proceeds to lend, or arrange lending, which is suitable for the customer. However, as accepted by the Court, it is noted that a proven breach of procedural obligations would naturally lead the Court to consider carefully the reasonableness of steps taken, and the suitability of lending.