Zaki and Others v Credit Suisse (UK) Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rix,Lord Justice Patten,The Chancellor of the High Court |
| Judgment Date | 01 February 2013 |
| Neutral Citation | [2013] EWCA Civ 14 |
| Docket Number | Case No: A3/2011/2727 |
| Court | Court of Appeal (Civil Division) |
| Date | 01 February 2013 |
[2013] EWCA Civ 14
The Chancellor of the High Court
Lord Justice Rix
and
Lord Justice Patten
Case No: A3/2011/2727
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION COMMERCIAL COURT
MR JUSTICE TEARE
2009 FOLIO 1393
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Robert Anderson QC and Shaheed Fatima (instructed by Howard Kennedy Solicitors) for the Appellant
Mr Adrian Beltrami QC and Mr William Edwards (instructed by Freshfields Brukhaus Deringer LLP) for the Respondent
Hearing dates : Wednesday 13 th June 2012
Thursday 14 th June 2012
Monday 9 th July 2012
Tuesday 10 th July 2012
This appeal, and the claim which underlies it, has been brought by Soheir Ahmed Zaki, the widow of Mohamed Magdy Zeid, a wealthy and successful Egyptian businessman, and by their two daughters, Shahira and Bahira Zeid. Mr Zeid died, at the age of 77, in May 2010. The claim arises out of the severe downturn in markets which occurred in September 2008. Mr Zeid had been invested in structured financial products, known as CDIs (the "notes"), which he had bought from the respondent (at trial, the defendant), Credit Suisse (UK) Limited (the "bank", or "CSUK"). When in October 2008 the bank made a margin call on Mr Zeid, he was unable or unwilling to meet it, his holdings were liquidated and he suffered a loss of US$ 69.4 million. His claim has been carried on by his widow and his daughters, who were joint account holders with him. At trial, Mr Justice Teare gave judgment in favour of the bank. The appeal centres around COB 7.9.3 and the suitability of the bank's lending to Mr Zeid for the purpose of his purchase of the notes.
COB stands for the Conduct of Business Rules. Until 31 October 2007 these were the Rules which regulated investment business pursuant to section 138 of the Financial Services and Markets Act 2000. From 1 November 2007 COB were replaced by COBS, the Conduct of Business Sourcebook Rules. We are concerned only with COB, because the notes involved in this appeal ("notes 1–7") were all purchased before the end of October 2007, in the period from 2 February to 22 October 2007.
In particular we are concerned with COB 7.9.3, which concerns "Restrictions on lending to private customers". It will also be necessary, however, to refer to COB 5.3.5, which is the central rule dealing with the "Requirement for suitability generally".
Mr Zeid, as I will explain below, was an experienced and self-confident investor, as well as being an immensely wealthy and successful entrepreneur. Even so, it was common ground that he was to be classified under COB as a "private customer" to whom the full range of duties owed to private customers applied. The judge found that, so far as notes 1 to 7 were concerned, the bank was in breach of no duty, and that the notes were suitable for Mr Zeid. The finding of suitability is a central and significant finding which the appellants need, in one way or another, to displace or undermine. Their argument, essentially by reference to the bank's lending and COB 7.9.3, a restriction on lending rule, follows a somewhat complex route, as will appear below: but the judge's finding of suitability, and also a finding of lack of causation, present difficulties in their path.
I shall set out the key wording of the critical COB rules now (but see also the Annex to this judgment).
Thus COB 5.3.5 R, the suitability rule, provided in part:
"(1) A firm must take reasonable steps to ensure that, if in the course of a designated investment business: (a) it makes any personal recommendation to a private customer to (i) buy…a designated investment…the advice on investments or transaction is suitable for the client."
The bank therefore had to take reasonable steps to ensure that its investment advice was suitable for Mr Zeid.
COB 7.9.3 R, the restriction on lending rule, provided in part:
"A firm…must not lend money or grant credit to a private customer (or arrange for any other person to do so) in the course of, or in connection with, its designated investment business unless:
(1) the firm has made and recorded an assessment of the private customer's financial standing, based on information disclosed by the private customer;
(2) the firm has taken reasonable steps to ensure that the arrangements for the loan or credit and the amount concerned are suitable, based on the information disclosed by the private customer, for the type of investment agreement proposed…
(3) the private customer has given his prior written consent to both the maximum amount of the loan or credit and the amount or basis of any interest or fees to be levied in connection with the loan or credit."
Thus, to gloss the matter broadly, the bank had to assess Mr Zeid's financial standing (based on information disclosed by him), a matter of process, and take reasonable care to ensure that, upon that basis, the arrangements for the loan, and its amount, were suitable for the type of transaction proposed (a matter of suitability), and obtain prior written consent to the essential details of the loan. Unless those matters were done, the bank should not have lent money, and, it may be said, were prohibited from doing so.
Issues have arisen on this appeal about the details of COB 7.9.3 and its relationship, so far as suitability is concerned, with COB 5.3.5. If the transaction as a whole, including the lending of money, and in particular the leverage connected with the transaction, is suitable, does anything else matter? Do matters of process matter? Is the test of suitability within COB 7.9.3(2) the same or narrower than the test of suitability within COB 5.3.5? If a transaction is found to be suitable within COB 5.3.5, as the judge found the transactions concerned to be suitable for Mr Zeid, does that eliminate any possible argument within COB 7.9.3? Or did the judge in any event consider the question of COB 5.3.5 suitability too narrowly, so as to leave an argument within COB 7.9.3 open, because the judge did not consider the bank's knowledge of and attitude to the liquidity of Mr Zeid's position, as distinct from his overall wealth? And, at a more detailed level of enquiry, had the bank been involved at all in arranging the loans concerned, where the actual lending had been done by a different company within the overall Credit Suisse group? And was the COB 7.9.3 suitability issue a limited one (see sub-rule (2)) concerned only with the type of transaction and the amount of the loan? And, at a more general level again, if there was any failure at all within the terms of COB 7.9.3, did a prohibition of lending in such circumstances ("must not lend…unless…") mean that all the consequences of such lending fall upon the bank, or is there still room to ask whether the bank's scope of duty extends so far, or whether Mr Zeid's determination to make the transaction in any event breaks any chain of causation?
These issues arose against the background of submissions that the judge's findings had not dealt sufficiently with COB 7.9.3 in his judgment, or with aspects of suitability; as well as with submissions that the points sought to be raised on behalf of the appellants were not open to them in the light of the way in which the trial had been conducted below.
By way of this introduction, I would finally mention that the trial below was concerned in all with ten notes bought by Mr Zeid on the personal recommendation of the bank. There is no appeal in relation to the failure of the claim with respect to notes 8–10, only with respect to notes 1–7. Notes 8–10, which were bought between 19 May and 27 June 2008, differed from notes 1–7 in at least two respects. First, they were bought during a period of greater market turbulence and volatility, not long before the crash of September 2008, and for these and other like reasons the judge found that, unlike his finding concerning notes 1–7, they were not suitable for Mr Zeid. He also found that the bank was in breach of its statutory duty with respect to those notes under what had become COBS 9.2.1. My reference to COBS 9.2.1 reflects the second main difference which affected notes 8–10, which was that they were bought in the period of COBS, not COB. Therefore, the suitability provision which used to be found in COB 5.3.5 was now to be found in COBS 9.2.1, and the restriction on lending provision which used to be found in COB 7.9.3 had disappeared. Instead there was COBS 9.3.4, headed "Loans and mortgages", which merely provided, as a matter of guidance, that —
"COBS 9.3.4 G When considering the suitability of a particular investment product which is linked directly or indirectly to any form of loan…a firm should take account of the suitability of the overall transaction."
Thus COBS enacted in terms what the judge had interpreted the overall effect of COB 5.3.5 and COB 7.9.3, read together, to be.
Despite those findings of unsuitability concerning notes 8–10, however, the judge went on to find that there was no causative loss, because he considered that it had not been shown that Mr Zeid had relied on the bank's advice. More than that —
"if Mr Zaki [the bank's representative] had advised that notes 8–10 were unsuitable, it is more probable than not that Mr Zeid would still have purchased them and suffered loss when they were liquidated" (at para [133]).
There is no appeal against the judge's ultimate conclusion with regard to notes 8–10. There is in any event a disconnection between notes 8–10 and notes 1–7 because the true basis of the...
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