In Rubenstein v HSBC Bank Plc [2012] EWCA Civ 1184 the Court of Appeal has awarded a private retail customer of HSBC a significantly more substantial victory than the somewhat pyrrhic victory awarded him at first instance.

In August 2005 Mr Rubenstein sought a safe investment for the proceeds of the sale of his home pending the purchase of another property. He wanted to find an investment, if that was possible, that provided a higher interest rate than a standard bank deposit, but he also wanted to be able to have the sale proceeds readily accessible in case of a repurchase. Mr Rubenstein contacted HSBC and was put in touch with one of its IFAs. The IFA was informed by Mr Rubenstein that he anticipated that the investment was unlikely to be longer than a year. Mr Rubenstein was advised that an alternative to placing money on deposit was to invest it in an AIG Premium Access Bond. The IFA emailed Mr Rubenstein the brochure for the Bond and quoted the interest rate for one of the funds within the Bond, the Enhanced Variable Rate Fund (“the EVRF”). The following day, Mr Rubenstein emailed the IFA making clear that he could not afford to accept any risk in the investment of the principal sum and asking the IFA to confirm what, if any, risk was associated with the product. The IFA replied that HSBC viewed the investment as being the same as cash invested in a deposit account and there was no greater risk to the capital. Mr Rubenstein invested in the EVRF. In the event, Mr Rubenstein had been unable to find another home three years later, so that when the global market turmoil that surrounded the collapse of Lehman Brothers in September 2008 occurred, he was still invested in the EVRF. Fearing that AIG was going to go bankrupt, Mr Rubenstein, like so many other investors, sought to withdraw his money. He eventually received back less than his initial capital investment. He sought to recover that loss from HSBC, claiming negligence, breach of contract and breach of the FSA’s Code of Business Rules.

His Honour Judge Havelock-Allan QC concluded that the advice provided to Mr Rubenstein was negligent. HSBC had been wrong to suggest that the EVRF was the same as a cash deposit. HSBC had also failed to consider the other funds available in the AIG Premium Access Bond as alternatives. In fact, the Standard Variable Rate Fund would have been more suitable than the EVRF. The Judge also found that HSBC had breached the Code of Business Rules. There was, however, a sting in the tail for Mr Rubenstein. Although the Judge accepted that, but for the negligent advice, Mr Rubenstein would not have invested in the EVRF, he held that what happened to the EVRF in September 2008 (that is, the run on the fund) was wholly outside the contemplation of HSBC and any competent financial advisor in September 2005. This meant that the losses claimed by Mr Rubenstein were unforeseeable and too remote. He therefore awarded Mr Rubenstein only nominal damages in contract.

The Court of Appeal disagreed. It concluded that the Judge had wrongly identified the cause of Mr Rubenstein’s loss as being the “unthinkable” run on AIG. In fact, what connected the erroneous advice and the loss was the combination of putting Mr Rubenstein into a fund which was subject to market losses whilst at the same time misleading him by telling him that his investment was the same as a cash deposit, when it was not. Accordingly, the correct cause of Mr Rubenstein’s loss was the loss in value of the assets in which the EVRF was invested. Although the extent of the global financial crisis might have been surprising to everyone, it clearly fell within the scope of HSBC’s duty to protect Mr Rubenstein from exposure to market forces (when he had made clear that he wanted an investment which was without risk and when HSBC had told him that his investment was the same as a cash deposit) and was not too remote.

HSBC had argued that because Mr Rubenstein had informed HSBC that the prospective time scale for investment was unlikely to be longer than a year, a loss two years outside of the period about which Mr Rubenstein spoke was beyond the scope of HSBC’s duties of care and foresight. The Court of Appeal described this argument as “powerful”, but ultimately rejected it. It concluded that the one year anticipated by Mr Rubenstein had never been certain. It was always contingent upon Mr Rubenstein finding a house. Mr Rubenstein had been misled into believing that his investment was safe and unaffected by market movement and he had been told by the IFA once the investment was made that no further advice was needed. There was, therefore, no reason for Mr Rubenstein to become concerned about the changing financial weather and no reason for saying that HSBC should be regarded as free from responsibility after the year was up.

Disappointed investors who have suffered losses in the recent financial crisis are increasingly turning to the courts to try and recover their losses from the banks and other institutions who sold them poorly performing investments. The Court of Appeal decision provides a welcome reminder that it is of fundamental importance in all such cases to consider with care the scope of the duty relied on and to focus, in particular, on the actual cause of the loss. The case is a clear warning to banks and financial advisors that it would be mistaken to assume that the surprising nature of the global financial crisis of 2008 renders losses sustained as a result of poorly performing investments too remote to be recovered.

As for Mr Rubenstein, the Court of Appeal’s decision provides a no doubt welcome boost to his interior design budget.