The Liability of Financial Ins3tu3ons for Mis- selling Financial Products. John L. Powell QC

Transcription

1 The Liability of Financial Ins3tu3ons for Mis- selling Financial Products John L. Powell QC 21 April 2012, DBJV Bri9sh- German Jurist Associa9on Durham Conference 1

2 Bases for allega3ons of mis- selling Breach of contract Tort Breach of statutory duty 2

3 The UK Financial Services Regulatory Regime Primary legisla9on: mainly the Financial Services and Markets Act 2000 ( FSMA ) Secondary (subordinate) legisla9on Rules made by the regulator: the Financial Services Authority ( FSA ) European regula9ons and direc9ves given effect in the UK by incorpora9on in the above including MiFID (Markets in Financial Instruments Direc9ve, Direc9ve 2004/39/EC ). 3

4 Historical Background 1 19 th century prospectus cases: misrepresenta9on claims based on tort of deceit (fraudulent misrepresenta9on) It is said there is no specific allega2on of fact which is proved to be false. Again I protest, as I have said, against that being the true test. I should say, taking the whole thing together, was there a false representa2on? I do not care by what means it was conveyed, by what trick or device or ambiguous language, all those are expedients by which fraudulent people seem to think they can escape from the real substance of the transac2on. If by a number of statements, you inten2onally give a false impression, and induce a person to act upon it, it is not the less false, although, if one takes each statement by itself, there may be difficulty in showing that any specific statement is untrue. Aarons Reefs v. Twiss, (1896) AC 273 at 281, per Lord Halsbury 4

5 Historical Background 2 Companies legisla9on C19 th onwards Common law developments: negligent misrepresenta9on professional liability investment advisers investment liability (specula9on- investment- savings- pensions) European direc9ves Statutory developments Gower Report: Review of Investor Protec2on (1985) ( People had a right to make fools of themselves, but not to be made fools of ) Financial Services Act 1986 (statute- backed self- regulatory regime) Financial Services and Markets Act (2000) (statutory regulatory regime) 5

6 The Financial Services and Markets Act 2000 Establishes single regulator: the Financial Services Authority (FSA) Establishes various regimes, including Promo9on Regime Regulated Ac9vi9es Regime Collec9ve Investment Schemes sub- regime Criminal, civil and disciplinary sanc9ons for contraven9on of requirements of the regulatory regime Gives FSA extensive powers including: powers to make rules: see FSA rule book powers to seek injunc9ons, remedial orders and res2tu2on orders for contraven9on of the requirements of the regime, against contravenor and any other person knowingly concerned in the contraven9on (FSMA ss ) 6

7 The Financial Promo3on Regime The financial promo3on restric3on : FSMA s. 21 A person must not, in the course of business, communicate an invita9on or inducement to engage in investment ac2vity Restric9on does not apply to: Communica9ons made by an authorised person. Communica9ons where content approved by authorised person Exempt communica9ons i.e. as specified in the Financial Promo3on Order or FPO : SI 2005/1529 (predecessor: SI 2001/1335): e.g. communica9ons to high net worth individuals (HNWIs), to investment professionals Civil liability for contraven9on of financial promo9on restric9on: at instance of FSMA (FSMA ss ) or private li9gant (FSMA ss. 30) FSMA s. 30: Agreements resul9ng from unlawful communica9on Agreement made by customer in consequence of unlawful communica9on is unenforceable against him & voidable at his instance Customer is en9tled to recover money paid or property transferred under the agreement. But, court has power to enforce the agreement and to refuse recovery if just and equitable in the circumstances: FSMA s. 30(4). 7

8 Regulated Ac3vi3es Regime (1) General The general prohibi-on : FSMA s. 19 No person may carry on a regulated ac2vity in the [UK], or purport to do so, unless he is (a) an authorised person; or (b) an exempt person Contraven9on: Criminal liability (FSMA s. 23) & civil liability Civil liability: at instance of FSMA (FSMA ss ) or private li9gant (FSMA ss ) FSMA s. 26: consequences of breach of general prohibi9on: Agreement made by person in contraven9on of general prohibi9on is unenforceable against counterparty & voidable at his instance Counterparty is en9tled to recover money paid or property transferred under the agreement. But, court has power to enforce the agreement and to refuse recovery if just and equitable in the circumstances: FSMA s

9 Regulated Ac3vi3es Regime (2): Regulated ac3vi3es Regulated ac-vi-es : defined in: FSMA s. 22 & secondary legisla9on: the Regulatory Ac-vi-es Order ( RAO ): SI 2001/544 Complex and intricate defini9ons of regulated ac2vi2es and investments Regulated ac9vi9es: ac9vi9es specified in the RAO and carried on by way of business. Specified ac9vi9es include ; Dealing in investments (a) as principal; (b) as agent Arranging deals in investments Managing investments Safeguarding and administering investments Establishing or opera9ng a collec9ve investment scheme ( CIS ) 9

10 Regulated Ac3vi3es Regime (3): FSA rules Authorised (i.e. by FSA) persons, in the conduct of their business subject to rules made by the FSA. Contraven9on of rules may give rise to statutory liability for breach under FSMA s. 150 Rules are contained (and designated as such) in the FSA s Handbook of Rules and Guidance: hmp:// FSA Handbook is huge: Divided sourcebooks (grouped in blocks ) and a massive Glossary of defini9ons. Each sourcebook is given has an acronym descrip9ve of its contents: PRIN, COBS etc. 10

11 Regulated Ac3vi3es Regime (4): The FSA s Principles for Business FSA s rules summated in these 11 principles (but not themselves ac9onable) 1 Integrity: A firm must conduct its business with integrity. 2 Skill, care and diligence: A firm must conduct its business with due skill, care and diligence. 3 Management and control: A firm must take reasonable care to organise and control its affairs responsibly and effec9vely, with adequate risk management systems. 4 Financial prudence: A firm must maintain adequate financial resources. 5 Market conduct: A firm must observe proper standards of market conduct. 6 Customers' interests: A firm must pay due regard to the interests of its customers and treat them fairly. 7 Communica9ons with clients 7 Communica3ons with clients : A firm must pay due regard to the informa9on needs of its clients and communicate informa9on to them in a way which is clear, fair and not misleading. 8 Conflicts of interest: A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client 9 Customers: rela3onships of trust: A firm must take reasonable care to ensure the suitability of its advice and discre9onary decisions for any customer who is en9tled to rely upon its judgment. 10 Clients' assets: A firm must arrange adequate protec9on for clients assets when it is responsible for them. 11 Rela3ons with regulators: A firm must deal with its regulators in an open and coopera9ve way, and must disclose to the FSA appropriately anything rela9ng to the firm of which the FSA would reasonably expect no9ce. 11

12 Regulated Ac3vi3es Regime (5): Conduct of Business rules FSA rules contain Conduct of Business rules in COBS sourcebook COBS and predecessor ( COB : pre rules) contains rules most ooen invoked in mis- selling claims Complex rules, fine- tuned by defini9ons, exclusions and qualifica9ons to deal with clients of different categorisa9ons (reflec9ng sophis9ca9on etc) and different circumstances Includes rules as to: general conduct of business obliga9ons client categorisa9on communica9ons with clients, including financial promo9on (e.g. financial promo2on must be fair, clear and not misleading ) providing informa9on about the firm, its services and remunera9on client agreements suitability (including best advice) appropriateness (for non- advised services) dealing and managing investment research product informa9on 12

13 Breach of statutory duty claim (1): FSMA s. 150 Breach of FSA rules may give rise to a breach of statutory duty claim under FSMA s.150(1). A contraven2on by an authorised person of a rule is ac2onable at the suit of a private person who suffers loss as a result of the contraven2on, subject to the defences and other incidents applying to ac2ons for breach of statutory duty' 13

14 Breach of statutory duty claim (2): Points on FSMA s. 150 Claim is only open to a private person (as defined) - generally a company is not covered Claim against authorised person (not unauthorised person nor exempt person) General burden of proof on the claimant: to iden9fy the relevant rule and to establish that it applied in the par9cular circumstances to establish that the defendant contravened the rule to establish that his loss, including that it was caused by the defendant s contraven9on of the rule and was foreseeable Defences include: contributory negligence limita9on (9me- bar) Other incidents include the right of defendant to claim contribu9on from another person who is also liable to claimant for same loss 14

15 Recent mis- selling case law : City Index Ltd. v. Balducci [2011] EWHC 2562 (Ch): spread- berng) : Zaki v Credit Suisse (UK) Ltd [2011] EWHC 2422 (Comm): Structured products : Rubenstein v HSBC Bank Plc [2011] EWHC 2304 (QB): AIG bonds : Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm) FX op9ons : Camerata Property Inc v Credit Swiss Securi2es (Europe) Ltd [2012] EWHC 479 (Comm): Structured products : Wilson v MF Global UK Ltd: [2011] EWHC 138 (QB): various CFDs, futures & op9ons, spread berng : JP Morgan Chase Group v. Springwell Naviga2on Corp. [2010] EWCA 1221 (CA) Russian debt instruments. First instance: [2008] EWHC 1186 (Comm) : Redmayne Bentley Stockbrokers v Isaacs [2010] EWHC 1504 Comm): Shares : Spreadex Ltd. v Sekhon [2008] EWHC 1136 (Ch): Spread- berng : Seymour v Ockwell [2005] EWHC 1137 (QB): CIS (OEIC/ICVC) 15

16 Approach to mis- selling claims (1): General Investment mis- selling claims may be assessed under the following headings: Du9es Breach Loss Defences Shared responsibility 16

17 Approach to mis- selling claims (2): Du3es Basic ques9ons include: Regulatory regime: which regulatory regime applies? If so, which and what is its impact? Related ques9ons if FSMA regime: Nature of product? Client categorisa9on? etc Contract(s): Between the provider and recipient of financial services? Other? If so, what is its scope and terms? Other bases of claim? Statutory basis? Tort? Trust? Etc. 17

18 Approach to mis- selling claims (3): Breach, loss, defences As to breach of du9es: issue essen9ally a factual enquiry. assess what actually done and what should have been done. may involve assessment of industry standards and prac9ces but not if relevant regulatory requirements breached As to loss, basic issues are Causa9on Foreseeability Measure of damages (involves counter- factual comparison) As to defences, frequently invoked are: Contributory negligence Limita9on (9me bar) 18

19 Issues in recent caselaw: Meaning of advice (1) Frequent issue: Was relevant transac9on execu9on- only or advisory. FSA rules impose different obliga9ons depending on how the transac9on is properly characterised Related issue: Did product provider give advice or only informa9on? Issue is relevant to: scope of duty of care in contract and tort causa9on What is advice? Objec9ve test: what an impar9al observer would conclude: having due regard to the regulatory regime and guidance, and to what passed between the par2es : Rubenstein 19

20 Issues in recent caselaw: Meaning of advice (2) FSA has issued guidance on issue in the PERG (Perimeter Guidance) part of its Handbook (in the context of financial promo9on): see PERG In the FSA's view, advice requires an element of opinion on the part of the adviser. In effect, it is a recommenda9on as to a course of ac9on. Informa9on, on the other hand, involves statements of fact or figures. (PERG G) In general terms, simply giving informa9on without making any comment or value judgment on its relevance to decisions which an investor may make is not advice. (PERG G) (See also PERG G & G) 20

21 Issues in recent caselaw: Meaning of advice (3) Advice or informa9on? - ooen a major bamleground in misselling claims As in other contexts: see South Australia Asset Management Corp v York Montague Ltd. ([1997] A.C. 191 (negligent valua9ons for lenders) Frequently involves extensive evidence and analysis and judgment- calls Case- law examples on both sides of advice/informa9on line: advice (Rubenstei, Zaki); informa9on (Redmayne, Bank Leumi v Wachner). 21

22 Issues in recent caselaw: Interrela3onship between regulatory regime and common law (1) Professional liability principles A professional owes to his client a duty of care in contract and tort In contract the duty to exercise care and skill arises as an implied term (if not express) Also a concurrent duty of care in tort Standard of care is that to be expected of the reasonably competent professional in like circumstances In assessing the standard, regulatory standards and guidance are relevant Breach of the du9es gives rise to liability in damages for breach of contract and the tort of negligence 22

23 Issues in recent caselaw: Interrela3onship between regulatory regime and common law (2) Regulatory requirements and guidance to common law du9es of care Many caselaw illustra9ons of requirements of FSA rules being taken also to be the same as requirements of common law du9es of care. So failure to give suitable advice may give rise to liability: under FSMA s. 150 for breach of FSA rules and in contract and tort of negligence for failure to exercise care Quaere: do the requirements of FSA rules circumscribe or set a limit on the requirements of the common law du9es of care? Recent case- law suggests that. 23

24 Issues in recent caselaw: Interrela3onship between regulatory regime an common law (3) Wilson v MF Global UK Ltd: Court rejected claimant s amempt to imply obliga9ons on defendant, an FSA authorised person, to comply with du9es imposed on a different category of regulated person, approved persons: it makes no sense to imply in a contract with authorised person an obliga2on to comply with statutory regula2ons governing approved persons. The defendants are given by Parliament a set of obliga2ons of their own (i.e. COB). Redmayne Bentley Stockbrokers v Isaacs: Court refused to imply a term in a contract which would have increased the detailed explicit regulatory obliga9ons that the defendant was under. 24

25 Issues in recent caselaw: Interrela3onship between regulatory regime an common law (4) Harrison v Black Horse Ltd. [2011] EWCA Civ 1128: Defendant had complied with FSA rules (ICOB) applicable to sale of insurance (PPI). Claimant argued that the credit rela9onship was unfair under the Consumer Credit Act 1974 given that defendant s commission (from the insurer, an associated company) amounted to 87% of the premium and was not disclosed to him. The FSA rules did not require posi9ve disclosure of the fact or amount of commission. The claimant s argument was rejected: the touchstone must...be the standard imposed by the regulatory authori2es, not resort to a visceral ins2nct that the relevant conduct is beyond the Pale. The decision is being appealed to the Supreme Court. 25

26 Issues in recent caselaw: Interrela3onship between regulatory regime an common law (5) Interrela9onship of reasonable care and risk Need for realis9c apprecia9on of: nature and degree of risk transferred to Defendant and nature and degree of risk retained by Claimant 26

27 Issues in recent caselaw: Loss: causa3on and remoteness (1) Another major bamleground in mis- selling claims. Not enough to establish a breach of duty (whether breach of statutory, contractual or tor9ous duty, FSA rules or other duty). No presump9on, arising from establishing breach of duty, that breach causa9ve of loss Burden of proof on claimant to demonstrate that his loss was caused by the breach and was not too remote. 27

28 Issues in recent caselaw: Loss: causa3on and remoteness (2) Points on causa9on: Reliance: For Claimant to demonstrate that he relied on the informa9on or advice provided by the provider e.g. Zaki: Claimant found to be an experienced investor who made investment decisions on the basis of his own views and did not rely on any recommenda9ons Absent reliance, no causa9on But even given reliance, causa9on may s9ll be negated: Counterfactual: Claimant would have acquired product in any event Loss the product of extraneous event unrelated to defec9ve informa9on/advice: e.g. Rubenstein and Camerata 28

29 Issues in recent caselaw: Loss: causa3on and remoteness (3) Rubinstein Defendant (HSBC) held to be breach of duty of care and s.150 statutory duty in advising claimant to buy an AIG Bond ( the same as cash deposited ) with the bank. Lehman collapse triggered problems for AIG which was unable to redeem claimant s bond in full. Claim for difference between claimant s actual return and the total return he would have received if he had placed his money a deposit account. Held: advice to invest in AIG bond did not cause the claimant's loss nor was the loss a reasonably foreseeable consequence of the investment: 'If it had not been for the extraordinary and unprecedented financial turmoil which surrounded the collapse of Lehman Brothers, Mr Rubenstein would probably have suffered no loss at all. 29

30 Fron3er and challenging areas Complex investment schemes Collec9ve investment schemes (FSMA s. 235) Hedge- fund claims Trans- na9onal fraud Accessory liability John L. Powell QC Publica9ons: Jackson & Powell on Professional Liability; Lomnicka & Powell, Encyclopedia of Financial Services Law; Powell, Issues & Offers of Company Securi2es 30