The Not So Remote Risks Of Recommendations

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.

Facts

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...