Rubenstein v HSBC Bank Plc
| Jurisdiction | England & Wales |
| Judge | Rix,Lloyd,Moore-Bick L JJ |
| Judgment Date | 12 September 2012 |
| Date | 12 September 2012 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Rix, Lloyd and Moore-Bick L JJ.
Adrian Palmer QC and John Virgo (instructed by Clarke Willmott LLP) for the appellant/claimant.
Stephen Cogley QC and Claudia Wilmot-Smith (instructed by DG Solicitors) for the respondent/defendant.
The following cases were referred to in the judgment:
Bates v Robert Barrow Ltd [1995] CLC 207.
British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railway Co of London Ltd (No. 2)ELR [1912] AC 673.
Brown v KMR Services Ltd [1995] CLC 1418.
Camerata Property Inc v Crédit Suisse Securities (Europe) LtdUNK [2012] EWHC 7 (Comm); [2012] 1 CLC 234; [2012] PNLR 15.
Hughes v Lord AdvocateELR [1963] AC 837.
Koufos v C Czarnikow Ltd (The Heron II)ELR [1969] 1 AC 350.
Needler Financial Services v Taber [2002] Ll Rep PN 32.
Pirelli v GacaUNK [2004] EWCA Civ 373; [2004] 1 WLR 2683.
Pope v Energem Mining (IoM) LtdUNK [2011] EWCA Civ 1043.
South Australia Asset Management Corp (SAAMCO) v York Montague Ltd [1996] CLC 1179; [1997] AC 191.
Supershield Ltd v Siemens Building Technologies FE LtdUNK [2010] EWCA Civ 7; [2010] 1 CLC 241.
Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas)UNK [2008] UKHL 48; [2008] 2 CLC 1; [2009] 1 AC 61.
Bank — Investment advice — Negligence — Conduct of business rules — Suitability — Causation — Foreseeability — Remoteness — Bank provided advice about investment and investor relied on advice — Investment in bond with insurance element wrongly said to be equivalent to cash deposit — Market turmoil led to suspension of withdrawals and loss of capital — Advice negligent and in breach of conduct of business rules — Failure to explain investment and ensure that investor understood risk — Whether loss unforeseeable and too remote because of extraordinary and unprecedented financial turmoil following collapse of Lehman Brothers — Loss of value of fund because of market conditions foreseeable even if extent unforeseeable — Market collapse not beyond scope of bank's duty — Bank not free from responsibility for wrong advice when investment lasted more than a year — Loss not too remote.
This was an appeal by the claimant against dismissal of his claim against the defendant bank for substantial damages for negligent advice in the recommendation of a financial investment (see [2011] EWHC 2304 (QB); [2011] 2 CLC 459), and a cross-appeal by the bank.
In 2005 the claimant wanted to find a safe place for the proceeds of the sale of his home pending the purchase of another property. He wanted to find an investment, if possible, that provided a higher interest rate than a standard bank deposit, but without risking his capital. The prospective time scale of his investment was no longer than a year. He invested in a bond issued by an insurance company (AIG) which the bank said was the same as a cash deposit in one of its accounts. Within the bond the money was invested in an enhanced variable rate fund (EVRF). That investment was thus not the same as a deposit, because an investor was not entitled to the return of his investment, only to its value at the time of request, which depended on the underlying assets held within the fund, including complicated derivative products.
In the event, the claimant was unable to find another home, so that he still held the investment three years later when the market turmoil which surrounded the collapse of Lehman Brothers in September 2008 occurred and withdrawals from the fund were temporarily suspended. When the claimant was able to withdraw his money he suffered a net capital loss of about £180,000. He brought a claim for breach of statutory duty, and in contract and tort.
The judge found that the bank was negligent in the advice which it gave, and in breach of various statutory duties under the conduct of business (COB) rules, and that the claimant relied on the bank's advice. However, the judge also found that the loss suffered by the claimant was not caused by the bank's negligence or breach of duties: it was rather caused by unprecedented market turmoil, and was unforeseeable and too remote. The claimant was therefore awarded merely nominal damages in contract (see [2011] EWHC 2304 (QB); [2011] 2 CLC 459).
The claimant appealed against the judge's decision on causation, foreseeability and remoteness. The bank cross-appealed against the finding of negligence and breach of the suitability requirement in the COB rules. The bank further contended that, at the time of the investment, it could have been regarded as safe, and that the bank had no duty which extended beyond the investor's own projection that the investment would last no more than a year; no loss was suffered within that year, or for well beyond it; any projection for the year beyond September 2005, when the investment was made, would have been that any risk associated with the investment was minimal.
Held , allowing the claimant's appeal:
1. The judge had been entitled to find that the bank had failed to recommend the most suitable investment, in breach of its duty in negligence and COB 5.3.5R. The claimant had told the bank the he could not risk any loss of capital. The bank failed to explain that the investment was not akin to a cash deposit. It was wrong and misleading to say, as the bank had done, that the investment was the same as a cash deposit. If the claimant had been properly advised he would not have made the investment, and if the bank had properly understood the investment it would not have recommended it. There had been no proper discussion with the claimant about whether he should invest in the enhanced variable rate fund within the bond rather than the standard variable rate fund.
2. In a case of statutory duty the question as to scope of duty was to be answered by reference to the statute itself, and it would have been better if the judge had considered statutory duty before considering the position in negligence and contract. The statutory purpose of the COB regime pursuant to the Financial Services and Markets Act 2000 was to afford a measure of carefully balanced consumer protection to the “private person”. The COB rules were designed to ensure that the investment adviser understood his client and his client understood risk. The judge's findings established that the adviser did not understand the client or the product that he was recommending. He misled the claimant into thinking that he had invested in something which was the same as cash. That was not a promising context in which to find that a loss suffered as a result of following a recommendation to enter into an unsuitable investment, when that loss came about because of the very factor which made the investment unsuitable (namely its inherent susceptibility to risk from market movements), was too remote to be recovered from the defaulting advising bank.
3. The judge had implicitly selected, for the purpose of giving effect to the law on remoteness, one out of a number of possible causal factors as the essential cause of the claimant's loss, namely a run on AIG which was unforeseeable. The extent of the run on AIG might have been unforeseeable, but it was not the run which ultimately caused the claimant's loss: it was the collapse in the value of the market securities in which the EVRF was invested which caused the loss. Such a loss was foreseeable even if its extent was not. Against the background of the facts found and of the origin of the transaction, and the scope of the bank's duties, what connected the erroneous advice and the loss was the combination of putting the claimant into a fund which was subject to market losses while at the same time misleading him by telling him that his investment was the same as a cash deposit, when it was not. Therefore, the correct selection of the cause of his loss was the loss in value of the assets in which the EVRF was invested. Therefore the advice and the loss were not disconnected by an unforeseeable event beyond the scope of the bank's duty. It was the bank's duty to protect the claimant from exposure to market forces when he made clear that he wanted an investment which was without any risk (and when the bank told him that his investment was the same as a cash deposit). It was wrong in such a context to say that when the risk from exposure to market forces arose, the bank was free of responsibility because the incidence of market loss was unexpected. (Brown v KMR Services Ltd[1995] CLC 1418, South Australia Asset Management Corp (SAAMCO) v York Montague Ltd[1996] CLC 1179; [1997] AC 191andTransfield Shipping Inc v Mercator Shipping Inc (The Achilleas)UNK[2008] UKHL 48; [2008] 2 CLC 1; [2009] 1 AC 61considered.)
4. Although the duration of the investment was undefined and uncertain and was initially thought to be no more than a year, that did not mean that the bank should be free of responsibility at the end of that year. The claimant was unconcerned because he had been told that the investment was equivalent to cash in an account. It followed from the fact that he was misled as to the nature of his investment, that he did not understand that he was exposed to a risk that he did not want. That risk, of market movement in the value of an investment of a type he did not realise he was committed to, was exactly the risk which caused his loss. Also, the whole purpose of COB was to protect the consumer from a failure to understand risk. In any event, a period of three years was, in terms of a cash deposit, not significantly different from an indefinite period of about a year. In the context of statutory protection for the consumer, a bank should reasonably contemplate that, if it misled its client as to the nature of its recommended investment, and thereby put its client into an investment which was unsuitable for him, when it could just as easily have recommended something more suitable which would have avoided...
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