Recent Updates On The Duty On Suitability and Mis-Selling In Hong Kong : The Decision In DBS Bank (HK Ltd) v Sit Pan Jit.

The Court of Final Appeal in DBS Bank (Hong Kong Ltd) v Sit Pan Jit has recently handed down reasons for dismissing Sit’s application for leave to appeal against the Court of Appeal’s judgment in favour of DBS, whereby Sit was ordered to pay to DBS US$3,429,724.27 including interest and costs and had his counterclaim for misrepresentation at common law and under section 108 of the Securities and Futures Ordinance (“SFO”) dismissed.  This update discusses the decision by the CFA which follows a long line of cases in Hong Kong whereby banks have been successful in relying on their non-reliance clauses in client agreements to defeat mis-selling claims brought by investors.

However, with the recent introduction of “suitability requirement” in client agreements and the new Professional Investor Regime by the Securities and Futures Commission (“SFC”), the CFA’s decision in this case may have to be reconsidered since banks may no longer rely on their non-reliance clauses when dealing with client complaints of mis-selling.

Background to Sit’s claims – The decision in the Court of First Instance

Sit had entered into agreements with DBS for the purchase of various financial products and he suffered significant losses during the 2008 financial crisis.  DBS initiated recovery proceedings against Sit and Sit counterclaimed against DBS for mis-selling.  During the trial at first instance, Sit claimed amongst other issues :

1. DBS agreed to make investments on Sit’s behalf pursuant to an oral contract between Sit and DBS;
2. DBS further made common law and statutory misrepresentations (pursuant to section 108 of the SFO) to Sit, prior to entering into the agreements including the risks associated with such agreements;
3. DBS breached its fiduciary, tortious and contractual duties to Sit.

DBS relied on its standard non-reliance clauses in the underlying agreement, the effect of which DBS argues, was that the bank had no duty to provide investment advice to Sit.  Even if the bank did provide any investment advice to Sit, such advice was on an execution only basis to carry out the instructions from Sit.

The Court of First Instance, and later upheld on appeal in the Court of Appeal and Court of Final Appeal, rejected Sit’s claims that an oral contract existed and his claims for misrepresentation. The Court held that even if the claims for misrepresentation did exist, Sit was estopped from asserting that he was induced to enter into the financial agreements or relied on representations from DBS because of the effectiveness of the bank’s non-reliance clauses.

Regulatory Landscape Post SFC Reforms – Impact on Mis-selling cases 

The New Clause – Death of Caveat Emptor?

On 8 December 2015, the SFC required banks and financial intermediaries to include a new clause in all of their client agreements on the suitability of investment recommendations and solicitations.  The required new clause reads :-

“If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any document which we ask you to sign and no statement we may ask you to make derogates from this clause.”

There is an 18 months transitional period (i.e. up to 9 June 2017) for all banks and financial intermediaries to comply with the new client suitability requirements.

New Professional Investor Regime In Place

Since 25 March 2016, the new Professional Investor regime has been in place which brings reforms with respect to how individual and corporate professional investors are treated by the banks and financial intermediaries.  Whilst previously individual investors could waive the related investor protection provisions (e.g. assessment of the individual’s financial situation and investment objectives / experience) and confirm their willingness to be treated as professional investors, now, financial intermediaries must establish the client’s financial situation, investment experience and investment objectives, including the level of knowledge of the client in derivatives.  As for investment vehicles, family trusts and “corporate professional investors” that are not institutional investors, intermediaries may only “dis-apply” certain investor protection provisions if the investor passes a new set of assessment criteria on its investment knowledge and sophistication.

As a result of the SFC’s reforms, the Professional Investor Regime will operate differently in practice as all financial intermediaries are now required to enter into a written client agreement with “individual professional investors” and also “corporate professional investors”, unless a CPI Assessment has been carried out for those “corporate professional investors” who agree to waive the relevant investor protection, whether :-

1. The “corporate professional investor” has the appropriate corporate structure and investment process and controls;
2. The person responsible for making investment decisions has sufficient investment experience;
3. The “corporate professional investor” is aware of the risks involved.

Since banks and financial intermediaries may no longer rely on the inclusion of non-reliance clauses in client agreements to limit their duties and obligations to clients, previous decisions in Hong Kong concerning the applicability of “non-reliance” clauses, such as the DBS vs Sit decision may be less relevant in light of the SFC’s changes to the Professional Investor Regime.

Comments

The area of product suitability is an evolving area of law which is projected to see a rising number of investor claims arising in the future, as the SFC continues its focus on enforcement to combat corporate fraud and misfeasance activities.  This includes proceedings against directors and executives for company failings including breaches of directors’ duties.

As a result of the new client suitability requirements and new Professional Investor Regime, banks and intermediaries will now have to consider their contractual obligations on suitability of investment recommendations, as opposed to only their regulatory obligations under the SFC’s Code of Conduct, as reliance on the use of the non-reliance clauses may no longer be sufficient defence against claims of mis-selling.