Those with an interest in the extent to which banks can be held liable for failed investments which they have sold will already be familiar with the case of Rubenstein v. HSBC Bank plc [2011] EWHC 2304 (QB), decided at first instance last year. The Court of Appeal1 has now approved the principal findings in that case on how banks must address a client’s investment needs when considering the suitability of recommendations. At the same time, it has overturned the controversial finding that losses suffered as a result of negligent advice were unforeseeable because of the unprecedented market conditions of 2008 and were therefore too remote to be recoverable.


In August 2005, Mr Rubenstein, a private customer for the purposes of the FSA rules then in force, decided to invest the proceeds of the sale of his home whilst he searched for a new property. Mr Rubenstein told Mr Marsden, a financial adviser employed by HSBC (the Bank), that he wanted an investment that, if possible, provided higher interest than a standard account, but stressed that he could not accept any risk to his capital. Mr Rubenstein said he was unlikely to need the investment for more than a year. Following email exchanges with Mr Marsden, Mr Rubenstein invested £1.2 million in a Premier Access Bond (PAB) which bought units in AIG’s Enhanced Variable Rate Fund (EVRF).

Three years later, Mr Rubenstein had not found another home and his investment remained in place. The market turmoil of late 2008 ensued. AIG collapsed. Mr Rubenstein tried to withdraw his money but a moratorium prevented his withdrawal. He suffered a loss of close to £180,000 on his capital investment.

First instance decision

Mr Rubenstein sought to establish that: (i) the Bank had advised him to invest in the EVRF; (ii) the Bank’s advice had been negligent; (iii) the Bank had not met its duties under the Conduct of Business (COB) rules, particularly COB 5 as to suitability2; and (iv) he had suffered loss as a result.

The Bank’s position was that Mr Marsden was merely providing an “execution-only” service. The court rejected the Bank’s arguments and held that the services provided by the Bank had, in fact, been advisory. The court applied an objective test in arriving at this conclusion and noted that it is “irrelevant whether Mr Marsden thought he was only providing information or whether Mr Rubenstein thought he was being given advice. The question is whether an impartial observer, having due regard to the regulatory regime and guidance, and to what passed between the parties, would conclude that advice had been given.” The court considered, amongst other things, the following factors in determining that the Bank had given advice:

  • Mr Rubenstein had asked for a recommendation. In the absence of an express disclaimer, any response to such an inquiry naming a particular product would constitute advice because it would imply that Mr Marsden was of a view that the product met the criteria (thereby implying a value judgment).
  • The Bank did not follow its Non-Advised Sales Process. The Bank’s “Key Facts about our services” document had a non-advised and an advised box. Neither box was ticked. The Bank’s “FEEPAY Form” was incorrectly filled in to indicate that the Bank was providing an advisory service.
  • Mr Marsden’s emails to Mr Rubenstein referred to “further advice” and promised a “letter of recommendation”.

The court therefore held that a bystander, reading Mr Marsden’s emails to Mr Rubenstein and the Bank’s records of how the transaction was processed, would conclude that it was being treated as advised.

The court made the following helpful points distinguishing the mere provision of information and the giving of advice:

The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client’s investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.”

The judge also found that the Bank’s advice was negligent, that it was in breach (both procedural and substantive) of the COB rules and that Mr Rubenstein had relied on the Bank’s advice. However, the court concluded that Mr Rubenstein’s loss was caused by the “extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman brothers” rather than by the Bank. The court held that these conditions could not reasonably have been foreseen at the time Mr Marsden had advised Mr Rubenstein in 2005 and therefore only awarded Mr Rubenstein nominal damages in contract.

Issues on appeal

Both parties appealed. The main issues considered on appeal and the Court of Appeal’s findings on these are summarised below.

Was the Bank’s advice negligent and in breach of COB 5.3.5?

The Bank did not seek to dispute on appeal that the services provided by Mr Marsden had been advisory. However, the Bank did cross-appeal in relation to the issue of negligence and breach of COB 5.3.5(2), which provided that, if the recommendation made by a firm to a private customer for a transaction relates to a packaged product, such as the PAB, it must be the most suitable from the range of packaged products on which investment advice is given.

The Court of Appeal agreed with the first instance judgment and held that the PAB was unsuitable for Mr Rubenstein for two main reasons:

  1. It was wrong of Mr Marsden to suggest that the EVRF was the same as a cash deposit. A bondholder in the EVRF took the risk not only that AIG might fail but also that the value of his units could fall as well as rise, depending on market conditions. It might have been right to say in 2005 that an investment in an EVRF was safe and only marginally more risky than a cash deposit. But it was not the same as a cash deposit.
  1. Mr Marsden did not attempt to consider other funds within the PAB as possible alternatives; in particular AIG’s more conservative standard variable rate fund (SVRF) would have been more suitable.

The court regarded no risk to his capital sum was the “sine qua non” of the investment sought by Mr Rubenstein. Mr Marsden knew that the money was required for the purchase of Mr Rubenstein’s family home. The risk of investing in the EVRF was not commensurate with the risk of placing moneys in a cash deposit. Therefore the Court of Appeal held that Mr Marsden’s advice that an investment in the EVRF was “the same as cash deposited in one of our accounts” was wrong and misleading.

In addition, the Court of Appeal held that, whether or not the SVRF was the most suitable investment, it was clearly a more suitable investment that the EVRF. Lord Justice Rix commented that, if Mr Marsden “had been listening to his customer and recognised that he was advising him, it is difficult to understand how he would not, acting properly, have recommended that fund to him in preference to the EVRF, even if the rate was less than the EVRF. To recommend the EVRF in preference to the SVRF was deliberately to make the decision for Mr Rubenstein that he was prepared to accept more risk than in the SVRF.”

The Court of Appeal rejected the Bank’s argument that, as Mr Rubenstein suffered no loss during the first year of his investment (being the likely term of his investment) no liability could arise for loss occurring thereafter. Rix LJ held that Mr Marsden “ought to have realised ... that once Mr Rubenstein made his investment he intended to stick with it until he found a new home, and that could be for an uncertain period”. The Court of Appeal concluded that, if Mr Marsden wanted to put a time limit on his responsibility, he ought to have made that clear, particularly in the context of telling Mr Rubenstein that his investment was the same as a deposit and he would need no further advice.


The Court of Appeal overturned the decision that Mr Rubenstein’s loss was not recoverable as it was caused by the market turmoil surrounding the collapse of Lehman Brothers.

Rix LJ commented that an investment adviser recommending a product could not be seen in the same light as a negligent doctor who tells a mountaineer his knee is fit to climb a mountain and the mountaineer then climbs a mountain and suffers an accident unrelated to his knee3:

“The doctor did not advise, let alone recommend, his patient to go mountaineering: he merely told him that his knee was in good shape. Mr Marsden, however not only advised Mr Rubenstein on the investment of his capital, he recommended a particular investment. He, so to speak, put him in it. If such an investment goes wrong, there will nearly always be other causes (bad management, bad markets, fraud, political change etc): but it will be an exercise in legal judgment to decide whether some change in markets is so extraneous to the validity of the investment advice so 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 those duties.”

The Court of Appeal concluded it was not the run on AIG, but the collapse in the value of the market securities in which the EVRF was invested, that caused Mr Rubenstein’s loss. Rix LJ commented that such a loss was both foreseeable and foreseen, because AIG’s brochure referred to “costs” which might result from “selling assets prior to their intended maturity date”. The amount of the loss was unforeseeably high but this did not change the fact that it was a foreseeable type of loss.

Rix LJ suggested that the judge at first instance may have regarded Mr Rubenstein’s loss as unforeseeable as he attributed such loss to the run on AIG, which he considered to be “unthinkable”. The Court of Appeal held that, in fact, what connected the erroneous advice and the loss was the combination of putting Mr Rubenstein into a fund that was potentially subject to market losses while misleading him into thinking his investment was the same as a cash deposit. Unlike the case of the doctor and the mountaineer’s knee, Mr Rubenstein’s loss and the cause were not disconnected by an event outside the scope of the Bank’s duty.

Although in September 2005 the investment in the EVRF may well have been considered without risk, it was clearly unsuitable for Mr Rubenstein because investment in an alternative fund or a deposit account would have resulted in no loss. Mr Marsden did not properly consider Mr Rubenstein’s needs as investment in the EVRF was inappropriate for someone who could not afford loss of capital.


This case is a rare example of a bank being found to have crossed the line between merely explaining a product and giving a recommendation.4 The Bank did not try to appeal against that finding, although it did try to overturn the ruling that its advice had been negligent.

Mr Rubenstein asked the Bank to suggest an investment that did not put his capital at risk. The Bank recommended an investment that did put his capital at risk. This case therefore provides a stark example of a bank failing to consider a client’s investment needs in making a recommendation. Other cases, in which an investor’s requirements or the bank’s failure to meet such requirements are more nuanced may not be as clear cut. The lessons to be learnt from this case include that it is essential for banks to have a proper understanding of a client’s needs (including, amongst other things, appetite for risk and length of investment) and, if they are going to give advice, to make a recommendation that addresses such needs.

This case also provides a warning to banks that a loss in value of market securities arising from market events will not be regarded by the court as unforeseeable and therefore not recoverable, even if the extent of the loss is unforeseeable. Market conditions were in this case insufficient to amount to an overriding cause of loss above the Bank’s recommendation. Banks should exercise caution even when recommending investments which in current market conditions appear to represent only a marginal risk to retail clients. If you cross the line into giving advice, and have not recommended a suitable product, you will have to pay for the consequences.