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Financial Advisor Negligence.

December 22, 2011

The recent Financial Advisor Negligence case of Adrian Rubenstein v HSBC Bank plc (2011) EWHC 2304 (QB) highlights that even if a financial advisor has been negligent the loss suffered must not be too remote. The Claimant Mr. Rubenstein contacted his local HSBC as to advice about an investment of £1,250,000.

The IFA at HSBC emailed the Claimant the brochure for the AIG Premier Access Bond. Mr. Rubenstein emailed the IFA on 23rd August 2005 and stated:

  • “We cannot afford to accept any risk in the investment of the principle sum. Can you confirm what if any risk is associated with this product?”

The IFA replied:

  • “We view this investment as the same as cash deposited in one of our accounts.”

Mr. Rubenstein went ahead and invested the £1,250,000 in the AIG enhanced fund.

In September 2008 when the global financial crisis hit involving Lehman Brothers the crisis spread to other financial institutions including AIG.

Withdrawals from the AIG Premier Access Bond were suspended. When the suspension was lifted and the Claimant was able to withdraw his investment he suffered a loss of £179,530.17.

Mr. Rubenstein launched a claim against HSBC Bank plc alleging negligent advice and claiming that if he would have placed his money in a deposit account for the same period he would have received his £1,250,000 back plus interest.

The judge held that HSBC had given investment advice. The test was whether a bystander would consider that the transaction was to treated as an advice rather than an execution only transaction.  The judge gave helpful guidance on what constitutes advice:

  • ”The starting point of any enquiry as to whether what was said by a person in a particular situation did or did not amount to advice. You have to look at the enquiry to which he was responding. If the client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer to that effect that advice has not been given. On the other hand, if a client makes a perfectly purely factual enquiry such as “What corporate bonds are currently yielding at x percent?” or “How does this structured product work?”, it is not difficult to conclude that a reply that simply provides the relevant information is no more that that …
  • The test is an objective one. It is irrelevant whether the IFA thought he was only providing information or whether the client thought he was being given advice. The question is whether an impartial observer, having a due regard to the regulatory regime and guidance, and to what past between the parties would conclude that advice had been given”.

The judge then went onto consider whether the advice was negligent. The judge held that the advice was negligent.

The client expressly stated that he did not want any risk. The advisor should have considered the standard and not enhanced fund. His advice that the enhanced fund was as good as cash was wrong.

  • Failure to consider alternatives was a breach of the COB 5.3.5(2)(R suitability).
  • A failure to also explain to Mr. Rubenstein that he may well get less back than he had invested was also a breach of the rules.

The judge then went on to consider whether Mr. Rubenstein relied on the advice. The judge considered that he did.

However the claim failed on the question of loss. The Court found that the events of 2008, and following were not reasonably foreseeable by the bank or any prudent financial advisor at the time the investment was recommended and/or made prior to September 2005.

Each case will have to be considered on it own merits. The nearer to a financial collapse the less likely such an argument by the bank would succeed. It is therefore important to consider each individual case on its merits. It is proposed by the FSA that section 150 of FSMA is amended, to compensate clients for breaches of COBS even if they did not cause the loss.

If the change in the law had come into effect at the time of Mr. Rubenstein’s claim then he would have recovered his loss in full from HSBC.