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14 August, 2016
The Hong Kong Court of First Instance handed down its judgment in relation to a mis-selling claim against a bank, ruling in favour of the plaintiff investors. This departs from the trend in respect of post-financial crisis mis-selling claims against banks, which have all been unsuccessful at the courts.
The judgment was made available on Tuesday (9 August 2016) and can be accessed here. The key difference between this case and the cases in the recent years, which has resulted in a different outcome, is that the court had held that the bank had contracted to provide advisory (rather than "execution-only") services. The profile of the investors is also different, being relatively "elderly and unsophisticated" as described by the court.
The approach taken by the court in this case may provide a glimpse of how courts will interpret the mandatory "suitability clause", which is required by the Securities and Futures Commission to be included in relevant client agreements with effect from 9 June 2017.
The action was brought by a Mr and Mrs Chang (an elderly married couple) and Nextday International Limited (of which Mrs Chang was the sole director and shareholder). The plaintiffs made a number of claims against the bank for negligent advice, misrepresentation and breach of contract, having incurred substantial losses in their private banking accounts with the bank from late 2004 to late 2008.
The court found that the bank had sold a large number of high risk investment products to the plaintiffs, such as equity linked notes, foreign currency options and accumulative forwards, and knock out daily accumulators. This was despite the plaintiffs' limited investment knowledge and lack of experience in high risk investment products, and despite the fact that their risk tolerance was at medium level. The plaintiffs' portfolios were also highly leveraged. The plaintiffs had complete trust in the bank's relationship manager, Mrs Li, whom they knew for a number of years before opening their accounts at the bank. They were found to have relied entirely on Mrs Li as to how they should conduct their investments.
In brief terms, the court held in favour of the plaintiffs on the basis of breach of contract:
1. By virtue of the account documents, the bank contracted to provide advisory services (rather than "execution only" services) to the plaintiffs.
2. Based on section 5 of the Supply of Services (Implied Terms) Ordinance and the decision in Susan Field v Barber Asia Limited [2004] 3 HKLRD 871, the bank owed a contractual duty of care to the plaintiffs which encompassed, at the very least, exercising reasonable care and skill by:
a. ascertaining and having regard to the plaintiffs' investment objectives and risk appetite;
b. offering investment products which were suitable to the plaintiffs' investment objectives and risk appetite; and
c. warning the plaintiffs of the risks inherent in the investment products which were being offered.
3. The bank had breached its contractual duty of care to the plaintiffs when it (through Mrs Li) advised and recommended the plaintiffs to purchase investment products which did not match their investment objective of being medium risk investors, and raised the risk level of their portfolios to higher than medium. The bank had also failed to provide any proper explanation of the risks and disadvantages of the investment products which they offered.
4. The bank had continued to breach its contractual duty of care as a result of its failure to advise the plaintiffs to alter the composition of their portfolios (to reduce the risk level to at least medium) and by continuing to advise and recommend investment products which maintained the risk levels of the portfolios at higher than medium.
This was a decision on liability only. Assessment of damages will be dealt with at a separate hearing.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
