Adrian Rubenstein v Hsbc Bank Plc
| Jurisdiction | England & Wales |
| Judge | His Honour Judge Havelock-Allan,HH Judge Havelock-Allan |
| Judgment Date | 02 September 2011 |
| Neutral Citation | [2011] EWHC 2304 (QB) |
| Court | Queen's Bench Division |
| Docket Number | Claim No. 9BS40313 |
| Date | 02 September 2011 |
[2011] EWHC 2304 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BRISTOL DISTRICT REGISTRY
MERCANTILE COURT
His Honour Judge Havelock-Allan QC
Claim No. 9BS40313
John Virgo (instructed by Clarke Willmott) appeared for the claimant
Stephen Cogley Q.C. (instructed by DG Solicitors) appeared for the defendant
This is a financial services mis-selling claim. The claimant, Mr Rubenstein, complains that he was wrongly advised by the defendant bank, HSBC, to invest a substantial sum in the AIG Premier Access Bond. When Lehman Brothers collapsed in September 2008, withdrawals from the Bond were temporarily suspended. When Mr Rubenstein eventually cashed in his investment, he suffered a loss of capital for which he now seeks to recover damages. Mr Rubenstein's claim is not the only claim in this court by an investor in the AIG Premier Access Bond who alleges that he was given negligent advice. There are other such claims in the Commercial Court. If this judgment is of interest to other claimants, I express a word of caution. It is necessarily based on the issues which were debated at the trial in this case. Those issues may have been narrower than the issues raised by other cases, and the evidence and argument correspondingly limited.
The AIG Premier Access Bond
I shall start by describing the nature and structure of the AIG Premier Access Bond ("PAB"). The PAB is a product issued by AIG Life which is the UK broker division of American Life Insurance Company ("ALICO"). ALICO is itself a wholly-owned subsidiary of American International Group Inc ("AIG"), which remains one of the largest insurance companies in the world. The PAB was launched on 20 October 2003 as an improvement on the existing AIG Premier Bond. The Premier Bond had only one variable interest rate fund (the Standard Fund) and a selection of Guaranteed Funds. The PAB introduced a second variable rate fund ("the Enhanced Variable Rate Fund" or "EVRF"). The Standard Fund became "the Standard Variable Rate Fund" or "SVRF". However the concept of the PAB was essentially the same as that of the Premier Bond. Bondholders would purchase units in one or more of the funds operated within the bond. Each fund was invested in a different range of securities and had its own terms. The bond itself was arranged so that units in any fund were held within policies of insurance, because this avoided UK capital gains tax, although investors would be liable to a higher rate of income tax charge on withdrawals in excess of a fixed annual amount. In the case of withdrawals i.e. partial encashment, investors had the option of requesting cancellation of one or more complete policies or spreading the withdrawal evenly across all of the policies in which their units were held.
The PAB was marketed as providing attractive returns to cautious investors. It is worth quoting the following passage from the product brochure distributed to financial advisers. Under the heading "Superior rates for maximum returns" the brochure stated:
"Look at the rates offered by the Premier access bond from AIG Life. Do they beat the net returns you currently receive from money on deposit? They should do because we combine:
•the tax efficiency of a life assurance bond, with
• the benefits of pooling your money together with the billions we have to invest, and
• our competitive approach to providing better returns.
You don't even have to lock your money away to benefit from our attractive rates. Access to your money is quick and easy. The Premier Access Bond is a single premium life assurance bond offering an alternative to traditional bank and building society deposits. The Bond has a range of unit-linked funds which invest directly in money market instruments. These funds offer both variable rates which change with market conditions, and guaranteed rates which remove any short-term uncertainty. The Premier Access Bond does not normally have any entry or exit charges. Furthermore, because the rates of return credited to the funds are net of administration charges, tracking your investment is straightforward."
The PAB offered a choice of 14 funds. Aside from the SVRF and the EVRF, there were 12 Guaranteed Funds. The present case is concerned only with the SVRF and the EVRF. The brochure explained how investments were held within the PAB in the following terms:
"Inside the Premier Access Bond your investment buys units in a range of funds, all of which invest in money market instruments to give you a competitive alternative to bank or building society deposits. The range of funds allows you to predict the growth in your bond either on a daily basis or over longer periods throughout the following 12 months.
There are currently 14 funds available; two variable rate funds and 12 guaranteed funds.
The Variable Rate Funds
The Variable Rate Funds have unit prices which normally increase on a daily basis at rates set in advance by AIG Life, reflecting the growth in the underlying assets of the fund and taking into account the size of your Bond. These rates change from time to time, and will generally move in line with changes in interest rates. As the growth rates are published in advance you will know how your funds will increase each day. However, as future rates are unknown, you will not be able to accurately predict how much your variable-rate funds will be worth in the future.
The Guaranteed Funds
The Guaranteed Funds each have a unit price which is guaranteed on a certain day in the future (the fund's Guarantee Date) and on the same day each year. There are 12 funds with one fund reaching its Guarantee Date each calendar month. As the unit price is guaranteed to rise from the unit purchase price to the Guaranteed Price, each fund offers a guaranteed rate of return if the units are held on to its Guarantee Date. AIG Life will publish these guaranteed rates each day so that you know what return you will achieve up to the Guarantee Date.
Other than on the Guarantee Date, the unit prices of the Guaranteed Funds are not guaranteed and will reflect the value of the assets held within the fund, and may rise or fall on a daily-two-day basis.
Therefore the Variable Rate Funds allow you to predict the growth in your funds on a daily basis but not over longer periods whereas the Guaranteed Funds allow you to predict the growth over a longer period, but with less certainty on a day-to-day basis."
The brochure then gave a more detailed description of the SVRF and the EVRF:
"The Standard Variable Rate Fund ("the Standard Fund") is a unit-linked cash fund investing in the short term, high-quality financial money market instruments. It aims to generate growth rates that reflect general trends in short-term interest rates whilst providing a very high degree of safety by holding a diversified portfolio of very high quality assets.
To make sure your money is as secure as possible, AIG Life invests in AAA and AA rated financial institutions which also have a P1 rated SUPERIOR ability for repayment of senior short-term debt obligations (P1 is the highest credit rating given to the financial institutions in the short term deposit market).
A typical fund portfolio would be invested in banks such as Barclays, Citibank, Halifax Bank of Scotland, Lloyds TSB and UBS.
The fund's unit price will be linked to the value of its underlying assets and the rate of return on the fund will be reflected in successive unit prices. The rate of return at any time, which is published by AIG Life, will depend upon market conditions and is not guaranteed.
As all the assets purchased are very high quality and short term in nature, the fund shall be considered to be very cautious, with a very high degree of capital protection. ….
The Enhanced Variable Rate Fund ("the Enhanced Fund") is similar to the Standard Fund but is aimed at achieving a slightly higher return by investing in a wider range of assets within the money markets. The fund offers a high degree of safety by holding the highest quality assets commensurate with its enhanced yield.
The fund's main objective is to produce a competitive return by investing in a wide range of high quality companies while maintaining a high degree of safety. Unsurprisingly, the fund will be dominated by many of the same names as the Standard Fund, with most of the fund invested in financial institutions.
The Enhanced Fund will mainly be invested in AAA and AA rated companies with the remainder in A rated companies. The fund may invest in a range of high quality debt instruments issued by these companies.
The fund should achieve a higher yield than the Standard Variable Rate Fund because it has access to:
(i) a wider range of companies. By allowing the list of companies to widen a little from those acceptable to the Standard Fund, the Enhanced Fund is able to invest in strong companies offering slightly higher yields. The companies are subject to strict quality checks and are still considered to be very safe investments.
(ii) a wider range of instruments issued by the companies it identifies. These assets will have a slightly higher yield as they have a smaller target market and may be more difficult to sell before they mature. However as the fund usually purchases assets to hold until maturity, it is in a position to take advantage of any yield enhancements.
(iii) assets with slightly longer periods until maturity. This enables the fund manager to take advantage of a positive sloping yield curve which rewards longer investments with higher yields.
Although the fund carries slightly more risks than the Standard Fund it should still be considered to be a cautious fund. Although the criteria are clearly wider than those of the Standard Fund, the fund places high importance on the preservation of capital."
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