Litigation involving alleged mis-selling has taken a new turn in Hong Kong. In the recent case of Chang Pui Yin v Bank of Singapore Limited  HKEC 1721, the Court of First Instance considered the sale of investment products by the defendant bank to its private banking clients. Notwithstanding the presence of industry standard disclaimers and non-reliance clauses, the Court found in favour of the plaintiffs. This case represents the first victory for plaintiffs against banks following a slew of mis-selling claims after the financial crisis in 2008.
Three things you should know
- A key differentiating factor from previous mis-selling cases was the vulnerable and unsophisticated nature of the plaintiffs. The Court also accepted that the plaintiffs had been sold products which exceeded their risk appetite.
- The Court had regard to the bank’s marketing literature when interpreting its standard terms and conditions. It found that these terms gave rise to an advisory duty in favour of the plaintiffs.
- The advisory duty was breached when investments products which did not match the plaintiffs’ investment objective were recommended by the bank’s sales staff.
Mr and Mrs Chang (the “Changs”), and Nextday International Limited, an investment vehicle of Mrs Chang, claimed damages against the bank for breach of contract, negligent advice, misrepresentation and/or undue influence in relation to their investments made through the bank.
Between 2004 to 2008, the Changs, in their 80s and 70s at that time, were sold a range of investment products (including accumulators and equity linked notes). These investments suffered significant losses as a result of the 2008 financial crisis.
The Court determined the Changs were medium-risk investors with moderate investment objectives. They possessed limited investment knowledge and lacked experience in high-risk, complicated investments.
Advisory duty and contractual estoppel
The main issue before the Court was whether the bank owed an advisory duty to the plaintiffs. The bank argued that, in light of the banking documentation, its banker-customer relationship with the plaintiffs was non-advisory and “execution-only”. The key provision in this regard was found in the services agreements stating that, in rendering the bank’s investment services, the investments “will be directed by [the plaintiffs] in the case of custody Accounts (Custody Accounts) and Accounts which are established on an advisory basis only (Non-Discretionary Accounts)”.
It was the bank’s case that “advisory” in this context meant “advice” or “instruction” received from its clients, rather than any obligation to provide investment advice. Further, the bank argued that other clauses in its services agreement and risk disclosure statement would be inconsistent with an advisory relationship, in particular, a clause confirming that the plaintiffs understood they were making their “own judgment in relation to the … transactions” and that the bank assumed “no duty to give advice or make recommendations” and “no responsibility for … for any investments or transactions made”.
Notwithstanding these arguments, the Court found in favour of the plaintiffs by determining that while the bank’s Custody Accounts were ‘execution only’, its Non-Discretionary Accounts gave rise to a requirement to provide advisory services. In doing so, the Court took into account the factual findings and the bank’s marketing brochure which suggested the provision of “investment advice” and services for “selecting the best products from the market to match the client’s risk reward profile”. The Court determined that the bank’s non-reliance clauses and disclaimers were limited in application to its Custody Accounts but had no application to its Non-Discretionary Accounts.
Having established an advisory duty, the judge established the parameters of such duty in terms of suitability and risks of investment. It was held that the standard of advisory duty is one of reasonable care and skill with at least three elements: (i) to ascertain and have regard to the investor’s investment objectives and risk appetite; (ii) to only offer products which were suitable to the investment objectives and risk appetite of the investor; and (iii) to warn clients of the risks inherent in the investments that were being offered.
The Court found that the bank’s relationship manager (the “RM”) recommended investment products which exceeded the Changs’ risk appetite and failed adequately to explain the risks of such products to them.
In so doing, the bank had breached its contractual duty of care towards the plaintiffs by advising and recommending products, which did not match their investment objective, and by failing to warn the plaintiffs of the risk inherent in the investments offered to them.
This decision might be viewed as indicating a shift towards a more critical approach by the Hong Kong courts in considering the non-reliance clauses and disclaimers which are typically relied upon in financial mis-selling litigation. However, in our view, Chang Pui Yin turned upon the manner in which the court interpreted an arguably ambiguous clause within the bank’s standard terms and conditions. This ambiguity allowed the Court to determine that the bank’s relationship with the plaintiffs was advisory in nature, notwithstanding other clauses which pointed to an opposite conclusion.
Aligned to this are the relatively unusual factual circumstances of the plaintiffs. In particular, the Court emphasised the unsophisticated nature of the plaintiffs, and drew distinctions between them and the existing case law involving plaintiffs who consciously invested in high risk products but claimed damages when those investments were unsuccessful.
Despite ruling in favour of the plaintiffs, the Court accepted the ongoing validity of the contractual estoppel defence in relation to relationships which are not advisory in nature. However, the shelf life of this defence is limited: by 9 June 2017, in compliance with the updated Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code”), financial institutions must incorporate a prescribed non-derogatory “suitability clause” in client agreements. The prescribed “suitability clause” provides that if the intermediary solicits or recommends any financial product, the financial product must be reasonably suitable for the client having regard to the client’s financial situation, investment experience and investment objectives.
This decision in Chang Pui Yin is helpful in illustrating how the courts may assess the standard of “reasonably suitable” once changes to the Code are fully implemented by intermediaries. In coming to the conclusion that the products sold did not match the plaintiffs’ investment objective and risk appetite, the judge took into account the plaintiffs’ education and personal background, their risk profile and investment history, tape recordings of communication between the plaintiffs and the RM, as well as expert evidence on the risk of products.
As the transition is made towards compliance with the updated Code, financial institutions need to implement rigorous suitability assessment and effective record keeping system to mitigate the risk of potential civil claims by clients.