The backwash from the Lehman and AIG collapses, in the shape of disgruntled investors, has been occupying the attention of many judges in many Courts across the world. The legal and regulatory duties of banks and financial advisors has come under particular scrutiny, as has the effectiveness or otherwise of the legal and regulatory protections apparently available to investors.
When the good times role and portfolios look healthy, investors tend to be more relaxed if portfolios, and some of their component parts, suffer the occasional dent in some instances. However, when the investment climate changes and the storm clouds muster, the general mood changes as good investment return opportunities dry up and big capital losses become the order of the day. The storm clouds affect the weather for everyone – the prevailing regulatory orthodoxy is that some folk should only be allowed out in the rain when given the full forecast and an umbrella, more seasoned and larger investors are generally free to continue to wear flip flops and if they get soaked then so be it.
It may come as a surprise then that the High Court recently awarded an investor, Mr Rubenstein, only nominal damages against his investment adviser, HSBC, when he invested his house sale proceeds in a recommended product – an AIG enhanced variable rate fund, having told his adviser he would not want his capital put at risk. The advisers told him the risk was the same as cash and the only risk was the ultimate risk of default. Some time after making the investment, Mr Rubenstein saw the difficulties AIG were in and sought the return of his money. Due to other redemption requests, he did not receive his capital for some time, and less than his original investment (£180k loss on a £1.25m investment). The first instance Judge found HSBC had acted negligently in recommending the product but also found that the loss he suffered was not caused by that, but by the unprecedented market turmoil at the time, which was unforeseeable and too remote. Likewise therefore HSBC had not, per the Judge, breached its Conduct of Business rules obligations to him.
The Court of Appeal found that the type of loss occasioned could have been foreseen, even though the extent of the loss was unprecedented, and that the risk to his capital had manifested itself accordingly. But for the recommendation, the erroneous investment advice, Mr Rubenstein would not have made the investment in the product.
In circumstances where professional advisers and to an extent their clients are becoming regulated to within an inch of their lives, one may find it difficult to see why Mr Rubenstein had to take (and fund) a case all the way to the Court of Appeal to be awarded the return of his investment even when the original Court found his investment adviser had acted negligently. It is possible that policy considerations as regards the opening of the floodgates to litigation influenced the first instance decision, but they ought not have done if they prevented justice from being done. Why did Mr Rubenstein have to go through all this when the bank had failed to comply with its statutory duty to recommend products which are suitable for customer’s needs? Ought there to be another forum for dealing with such matters outside the Courts? The Court of Appeal took the right approach on causation and on foreseeability, it is unfortunate it took Mr Rubenstein so much time, money and effort to secure his order in a situation which to the layman looked obvious from the day he brought his claim.