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England and Wales High Court (Queen's Bench Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Rubenstein v HSBC Bank Plc [2011] EWHC 2304 (QB) (02 September 2011)
URL: http://www.bailii.org/ew/cases/EWHC/QB/2011/2304.html
Cite as: [2011] 2 CLC 459, [2011] EWHC 2304 (QB), [2012] PNLR 7
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QUEEN'S BENCH DIVISION
BRISTOL DISTRICT REGISTRY
MERCANTILE COURT
B e f o r e :
____________________
| ADRIAN RUBENSTEIN |
Claimant |
|
| - and - |
|
|
| HSBC BANK PLC |
Defendant |
____________________
Stephen Cogley Q.C. (instructed by DG Solicitors) appeared for the defendant
____________________
Crown Copyright ©
- This is a financial services mis-selling claim. The claimant, Mr Rubenstein, complains that he was wrongly advised by the defendant bank, HSBC, to invest a substantial sum in the AIG Premier Access Bond. When Lehman Brothers collapsed in September 2008, withdrawals from the Bond were temporarily suspended. When Mr Rubenstein eventually cashed in his investment, he suffered a loss of capital for which he now seeks to recover damages. Mr Rubenstein's claim is not the only claim in this court by an investor in the AIG Premier Access Bond who alleges that he was given negligent advice. There are other such claims in the Commercial Court. If this judgment is of interest to other claimants, I express a word of caution. It is necessarily based on the issues which were debated at the trial in this case. Those issues may have been narrower than the issues raised by other cases, and the evidence and argument correspondingly limited.
- I shall start by describing the nature and structure of the AIG Premier Access Bond ("PAB"). The PAB is a product issued by AIG Life which is the UK broker division of American Life Insurance Company ("ALICO"). ALICO is itself a wholly-owned subsidiary of American International Group Inc ("AIG"), which remains one of the largest insurance companies in the world. The PAB was launched on 20 October 2003 as an improvement on the existing AIG Premier Bond. The Premier Bond had only one variable interest rate fund (the Standard Fund) and a selection of Guaranteed Funds. The PAB introduced a second variable rate fund ("the Enhanced Variable Rate Fund" or "EVRF"). The Standard Fund became "the Standard Variable Rate Fund" or "SVRF". However the concept of the PAB was essentially the same as that of the Premier Bond. Bondholders would purchase units in one or more of the funds operated within the bond. Each fund was invested in a different range of securities and had its own terms. The bond itself was arranged so that units in any fund were held within policies of insurance, because this avoided UK capital gains tax, although investors would be liable to a higher rate of income tax charge on withdrawals in excess of a fixed annual amount. In the case of withdrawals i.e. partial encashment, investors had the option of requesting cancellation of one or more complete policies or spreading the withdrawal evenly across all of the policies in which their units were held.
- The PAB was marketed as providing attractive returns to cautious investors. It is worth quoting the following passage from the product brochure distributed to financial advisers. Under the heading "Superior rates for maximum returns" the brochure stated:
- the tax efficiency of a life assurance bond, with
- the benefits of pooling your money together with the billions we have to invest, and
- our competitive approach to providing better returns.
- The PAB offered a choice of 14 funds. Aside from the SVRF and the EVRF, there were 12 Guaranteed Funds. The present case is concerned only with the SVRF and the EVRF. The brochure explained how investments were held within the PAB in the following terms:
- The brochure then gave a more detailed description of the SVRF and the EVRF:
- Pausing here, it is plain that an investment in the PAB was not the same as making a cash deposit. An investor in the PAB became a policyholder, holding units in one or more funds. The units were not themselves tradeable and their value depended on the value of the securities which the fund had purchased. Since the bond was an insurance product, which provided a modest element of life cover (equivalent to 1% of the bond's value), statutory protection for bondholders was governed by the Policyholders Protection Acts rather than the regime of protection for depositors under the Financial Services Compensation Scheme. The former provided for compensation equivalent to a maximum of 90% of the surrender value of the policy. The latter provided compensation up to a maximum sum for each deposit account. In 2005 that sum was £33,000. Since there was no guaranteed surrender value for an investment in the variable rate funds, the statutory protection for such an investment could be worth less than in the case of a deposit.
- It is also clear that the essential distinction between the two variable rate funds lay in the classes of asset held in those funds, the credit rating of those assets, and their duration to maturity. The EVRF was slightly more adventurous than the SVRF in the quality of the assets it purchased, and it contained securities with a longer term to maturity than the SVRF. It was therefore less liquid than the SVRF in two senses. First, the proportion of assets maturing in less than 6 months was very much lower, so fewer of the assets were due to mature as cash in the short term. Second, the cash value of the longer-dated assets, if sold before maturity, would depend on the health of the secondary market in which they could be sold. The discount to acquisition cost on an early sale of such assets could fluctuate.
- The price risk associated with such an early sale was expressly addressed in the product brochure and the key features document, although the warning was couched in terms of "costs" rather than "losses". The following statement appeared under the heading "Adjustment to unit prices" in the product brochure:
- The warning was repeated as one of the "Risk Factors" highlighted on the first page of the key features document. The key features document began as follows:
- So far I have only quoted from the literature that was designed to be read by would-be investors in the PAB. The Standard Policy Conditions, Fund Rules and Asset Rules gave more detail about how the PAB worked, but these were normally only given to new bondholders. The Standard Policy Conditions included the following about the valuation of units in the funds:
- The Fund Rules for the variable rate funds provided:
- AIG Life produced a factsheet each month containing fund information for financial advisers. There was a separate factsheet for the SVRF and the EVRF. They included pie charts illustrating the distribution of the fund's underlying assets by asset quality i.e. credit rating, and also by sector, e.g. sovereign debt, finance, transport and "other". There were also bar charts of distribution by term to maturity and asset class. AIG Life also produced a quarterly newsletter for the PAB which contained a report on the market and how the various funds were performing. At the trial the monthly factsheets and quarterly newsletters were referred to collectively as the "AIG updates". The AIG updates were not sent to bondholders. HSBC received copies but, somewhat surprisingly, did not copy them to the individual financial advisers in its employ.
- In the present case the AIG updates are of limited significance because no claim is now made by Mr Rubenstein that HSBC should have monitored the updates between September 2005 and September 2008 and warned him to switch out of the EVRF or withdraw from the PAB altogether. Their significance lies only in what they showed of the profile of the assets in the EVRF between the launch of the PAB in the autumn of 2005 and the point at which Mr Rubenstein was considering investing in August 2005. Here the picture is mixed. There was an increase in the percentage of longer-dated investments, especially those with 3-5 years to maturity. On the other hand, the overall credit rating of the assets appears to have improved from 23% having a Standard & Poor's AAA rating and 68% having an AA rating in January 2004, to 39% having a Moody's Aaa rating and 51% having an Aa rating in August 2005 (I make the assumption here that the S&P and Moody's rating systems are comparable). In the same period the number of asset holdings in the EVRF doubled from 102 to 273. The increase meant that the managers of the EVRF were spreading their net wider. A spread of assets is usually regarded as a good thing. Statistically it increases the likelihood of one of the assets suffering a rating downgrade: but the likely impact on unit value will be less than if one of only a smaller number of asset holdings was to be downgraded. The overall shift to longer-dated stocks was more important. It meant that the EVRF had greater exposure to the secondary market in the unlikely event that assets had to be encashed to meet a large number of withdrawals.
- In 2005 Mr Rubenstein was a customer of HSBC. He banked at their Cardiff Queen Street branch. In or around the middle of August, he approached the bank about investing a sum of £1.25 million. This represented the proceeds of sale of his matrimonial home in North London. Completion of the sale was about to take place, and he and his wife had already decided not to buy another property immediately. They intended to move into rented accommodation, while they looked for the ideal new home. In the meantime they wanted to deposit their money somewhere where it would earn a good rate of interest, to help them pay the rent, and where it would be readily accessible if they found the home they were looking for.
- A point touched on at the trial was whether Mr and Mrs Rubenstein were sophisticated investors. It is not obvious what relevance this point has, because it is not suggested by the bank that Mr Rubenstein deserved to be classified as other than a private customer who was a retail customer. If further refinement of that classification is appropriate (and I am not persuaded that it is), I would accept that Mr Rubenstein was a retail client of medium sophistication and that the bank was entitled to regard him as such. Although he was the sole investor, his capacity to understand the nature of the product he was buying cannot be considered in isolation from that of his wife, because she discussed the investment with him before it was made, and her investment experience was greater than his. Mr Rubenstein was and is a solicitor. He was admitted in 1994. In 2005, he was 38 years old and working in a firm of solicitors as a specialist in media law and intellectual property. His wife, Elisa, was then at home looking after their two young children, aged about 4 years old and 2 years old respectively. However, between 1985 and 2000 Mrs Rubenstein was an investment banker. She is a U.S. citizen who was brought up in Japan and Hong Kong and in consequence is a fluent Japanese and Chinese speaker. Her first job was as a management trainee at Fuji Bank in New York. She then transferred to the U.S. investment bank, Lehman Brothers, and worked for them between 1989 and 1999. She moved with Lehman Brothers from New York to London in 1990, where she met her husband. They married in 1997. For the last year or 18 months before giving up work in 2000 to start a family, Mrs Rubenstein was a director of Merrill Lynch in London. In that post, and also in her years at Lehman Brothers (where she eventually ended up heading a department), she was responsible for managing Japanese and Chinese clients for whom she bought and sold Asian investment bonds. Mrs Rubenstein was well remunerated as an investment banker. The house which they were selling in the summer of 2005 had been bought with her money, shortly before they got married. By 2005, Mrs Rubenstein had a personal investment portfolio worth about $750,000, which was managed for her by Citibank in New York.
- Given their background and training, I have no doubt that Mr and Mrs Rubenstein, individually and collectively, were well able to understand the essential characteristics of the PAB as explained in the brochure and key features document, although Mrs Rubenstein's grasp of the finer points about the credit rating and liquidity of the categories of securities held within the funds would have been greater than that of her husband. How much they in fact read and understood is a different matter, to which I shall return later. However it is important to note that the bank knew nothing of Mrs Rubenstein's curriculum vitae. It knew only that Mr Rubenstein was a lawyer.
- Before he approached the bank, Mr Rubenstein had done some homework. He had looked at deposit account rates on the internet using a comparison website. The rates offered were always for sums which were capped at no more than £1 million. He believed that a better rate might be obtained for a larger sum, but only if he made a direct approach to the deposit taker. It was at the suggestion of his father that Mr Rubenstein began by approaching HSBC. He telephoned an account manager at the Queen Street branch called Sue Hollyman and asked her what home the bank could suggest for the forthcoming sale proceeds. Ms. Hollyman gave Mr Rubenstein the telephone number of Mr Matthew Marsden who, she said, would be better able to provide the kind of information he was seeking.
- Mr Marsden was a financial adviser, employed at the private client department of the bank in Bute Street in Cardiff. He was responsible for providing investment advice to the customers of at least 7 of the local branches of the bank and for handling their investment transactions. Although employed by HSBC, Mr Marsden was not confined only to promoting or dealing in the bank's own financial products. He was a fully qualified "whole of market" IFA (independent financial adviser). However, as we shall see, he was only permitted to recommend financial products which were on the bank's approved list.
- Mr Rubenstein spoke to Mr Marsden on the telephone, probably on 22 August 2005. Whether Mr Marsden rang Mr Rubenstein or vice versa does not greatly matter: but Mr Marsden believes that it was he who made the first contact. The information he had been given by Ms. Hollyman was that Mr Rubenstein was about to receive a large sum from the sale of his home and wanted to place it on interest-bearing deposit with ready access for no more than about 6 months. Mr Rubenstein confirmed that this was the position. He explained that he had been looking at advertised deposit rates, including the rate currently offered by HSBC, and was looking for something which offered a better rate of return. Mr Marsden's evidence was that Mr Rubenstein said that he was looking for something other than a deposit: but I am satisfied that Mr Rubenstein did not narrow the brief so as to rule out a deposit or a deposit style account, if the rate was better than the rates he had identified in the course of his internet research. Mr Marsden told Mr Rubenstein that an alternative to placing the money on deposit was to invest it in the AIG Premier Bond. He did so because, as he says in his witness statement, at that time "HSBC's alternative for 'secure' money with immediate access was the AIG Premier Access Bond".
- In this first conversation, Mr Marsden gave no more than the briefest of descriptions of the PAB. He said it was an insurance based product and offered to send Mr Rubenstein some product literature and an illustration of the interest rate obtainable for a sum of over £1 million.
- On 23 August 2005, Mr Marsden sent Mr Rubenstein an e-mail headed "Account Information". Attached to it, in pdf format, was a copy of the product brochure and key features document produced AIG Life. The message said:
- These were the rates for the EVRF, although Mr Marsden did not say so. Mr Marsden did not quote (in fact he never quoted) equivalent rates for the SVRF. The corresponding rate for a Premier deposit account at HSBC was 3.93%, which Mr Rubenstein would have known or could easily have found out because the bank published it.
- I digress at this point to describe the system of product selection at HSBC. All products offered by the bank's IFA sales force are ones which have been selected and approved by the bank's Product Research Team. The team maintains panels of approved products which have to meet certain criteria. The provider must meet minimum standards of financial strength and minimum service standards. Where the product is investment based (like the PAB), the underlying funds must also satisfy standards of fund size and performance. The Product Research Team at HSBC approved the PAB on 4 November 2003 as an investment which could be offered by its IFAs to customers. There was no evidence of precisely how the PAB was considered to meet the criteria for selection. It was categorised as an investment bond. The bank maintained 8 panels of investment bond under different headings. It seems that the two variable rate funds, both of which were rated by the bank as "Secure", appeared on the Guaranteed Income and Growth panel. Although Mr Marsden was a "whole-of-market" adviser, the process of selection and approval by the Product Research Team meant that the range of products he could sell on behalf of the bank was limited. Mr Marsden said that recommending a product "off panel" was discouraged and that higher authority was required in order to do so. His evidence was that, in practice, there were only 3 panel products he could put forward to a client looking for a safe haven for cash which was either a deposit or akin to a deposit. One was HSBC's Premier deposit account. Another was a bond issued by Cardiff Pinnacle Insurance plc. The third was the PAB. Mr Marsden ruled out the bank's Premier account because the rate was no better than the deposit rates which Mr Rubenstein had already rejected. He dismissed from the reckoning the Cardiff Pinnacle bond because there were restrictions on access and investment was subject to a maximum limit of £250,000, unless Pinnacle otherwise agreed. That left the PAB, in Mr Marsden's view, as the only sensible option.
- Mr Marsden's e-mail distinguished between the return on a commission basis and the return on a fee basis. The bank offered customers the choice as to how it would be remunerated for its services. This was explained further to Mr Rubenstein in a second e-mail which Mr Marsden sent on the morning of 23 August:
- The two disclosure documents which Mr Marsden attached were in pdf format (he also attached a copy of the bank's Terms of Business). The disclosure documents were headed, respectively, "Key Facts about our services" and "Key Facts about the cost of our services". The first of these was divided into eight numbered sections. The headings of the second, third and fourth sections were: "Whose Products do we offer?", "Which service will we provide you with?" and "What will you have to pay for our services?". There was more than one statement under each of these headings and a box which could be marked to show which one applied. In paragraph 2 ("Whose Products do we offer?"), someone had marked the box opposite the statement: "We offer products from the whole of the market". There were three statements in section 3 ("Which service will we provide you with?"):
- conduct a full assessment of your needs.
- offer advice on whether a non-stakeholder product may be more suitable."
- Section 4 was entitled "What will you have to pay us for our services?". It contained two statements, the boxes for which were again unmarked:
- The Key Facts guide about the cost of services contained four numbered sections. Section 2 was entitled simply: "Our services". It read as follows:
- gather and analyse personal information about you, your finances, your needs and objectives
- recommend and discuss any action we think you should take and, with your agreement, a range of relevant investments for you.
- The following day Mr Rubenstein sent an e-mail back to Mr Marsden as follows:
- Mrs Rubenstein was in New York visiting her parents. At some point, either on the evening of 23 August or after midday on 24 August, Mr Rubenstein spoke to her by telephone and told her that he had found a home for their money in a bond offered by AIG. He said it was a form of deposit involving life insurance. Mrs Rubenstein knew AIG to be a large and reputable company but she wanted to be sure the capital was safe, however good the interest rate might be. Her evidence was that she asked her husband to get a guarantee from HSBC that there was no risk to the capital. By "guarantee" she meant an assurance that the deposit was as good as cash rather than a guarantee in the legal sense. In the light of this conversation Mr Rubenstein sent the following further e-mail to Mr Marsden at 1612 hours on 24 August:
- There was no further contact between Mr Rubenstein and HSBC until 22 September. That was the date on which the sale of the Rubensteins' house was due to be completed. Only then would they have the funds to invest. Sometime during the morning of 22 September, Mr Rubenstein rang Mr Marsden and told him that the funds were coming through and that he had decided to invest all of the money in the PAB. Mr Rubenstein gave evidence that he had actually resolved on this course on 24 August, based on the quotes Mr Marsden had given him and his e-mail exchanges with Mr Marsden that day. However there had been no discussion of the alternative funds within the bond. The only fund that Mr Marsden had quoted or mentioned by name was the EVRF.
- Mr Rubenstein was not willing to accept that he had resolved on 24 August to put his money specifically into the EVRF, but I am sure that is how Mr Marsden would have understood the decision Mr Rubenstein communicated to him on the telephone on 22 September because the EVRF was the only one of the funds that Mr Marsden had mentioned. It was put to Mr Rubenstein that he could have read the product brochure and asked Mr Marsden on 22 September about the other funds. Not having done so, the inference was that Mr Rubenstein had exercised his own judgment in selecting the EVRF rather than any other fund. I do not think that is a fair interpretation of what happened. Mr Marsden told Mr Rubenstein about one fund and one interest rate offered by the PAB. Whether what he said amounted to a recommendation or to advice, rather than simply to the conveying of factual information, is a matter I shall address later. Mr Rubenstein decided to invest in the fund he had been told about. He was no more discriminating than that. He exercised no independent choice of his own other than to prefer the EVRF over a bank or building society deposit.
- What happened next was that Mr Marsden sent an e-mail to Mr Rubenstein at 14.03 on 22 September 2005 with three documents attached to it. One was the PAB Application Form, one was a telegraphic transfer request form for the funds, and one was the bank's Fee Agreement Form ("the FEEPAY Form"). The e-mail gave guidance as to how the Application Form should be filled in. Section 1 was for "Personal Details" and was described by Mr Marsden as "self explanatory". Section 2 was for "Investment Details". Here Mr Marsden told Mr Rubenstein to "… put the full amount you want to put away into the enhanced fund box (also put the total in)". Section 3 was for details of the account to which any funds withdrawn from the bond should be sent. Section 4 was for details of income drawdown. Section 5 contained an Investor's Declaration and box for signature.
- Mr Rubenstein filled in the Application Form and faxed it to HSBC's Private Clients Department in Cardiff on Friday, 23 September. In Section 2, he put "£1,250,000" in the Enhanced Fund box and stated that £1,250,000 was the total amount being invested. He then made an error. Section 2 went on to say:
- Mr Rubenstein was not proposing to invest in any of the Guaranteed Funds, so this choice did not apply to him. But he was confused, and placed a tick in the box opposite option (b). In the course of his oral evidence he suggested that he had had a second telephone conversation with Mr Marsden on 22 September about how to fill in Section 2 of the Application Form and that, in the course of this conversation, Mr Marsden had told him to choose the EVRF. I think Mr Rubenstein's recollection is at fault here. Mr Marsden does not recall any second conversation of this kind and I am satisfied that it did not take place. If it had done, Mr Rubenstein would not have made the error of ticking option (b), or he would have corrected the error. As it is, the Application Form was despatched the next day with the error in it. I am quite certain that Mr Rubenstein placed all of his money in the Enhanced Fund box as a result of the guidance given by Mr Marsden in his e-mail of 22 September. I find that that guidance was given because Mr Rubenstein gave the impression to Mr Marsden in the telephone conversation which took place before the form was sent, that he had decided to invest in the EVRF.
- In Section 4 of the Application Form Mr Rubenstein stated that he wished to make annual withdrawals of £27,300 from his investment in the EVRF. This was the figure he and his wife had calculated they would need for renting a property while they house-hunted. In Section 5, Mr Rubenstein signed the Form and included the date of 23 September. In doing so he signed the Investor Declaration, the last paragraph of which (the "Application Statement") stated as follows:
- Mr Marsden was away on holiday during the whole of the week beginning Monday, 26 September. The processing of the application was handled by Ms. Elsie Mead in the Private Client Department. On the Monday, Mr Rubenstein exchanged a series of e-mails with Ms. Mead about the possibility of the bond being taken out either in his wife's name or in their joint names. As a non-working housewife, Mrs Rubenstein was not paying U.K. income tax, and as a US citizen her US income was not taxable here. So it had occurred to them that it might be advantageous if the bond was in Mrs Rubenstein's name because, as the product brochure and key features document explained, income tax at the higher rate was chargeable on withdrawals above 5% of the bond value in any policy year and on the final gain in value of the bond when surrendered. Mr Rubenstein left this consideration to rather late in the day, but it was in any case a fruitless inquiry. He had not spotted that in the Investor Declaration in the Application Form, there was a warranty that the applicant was not a US citizen. The PAB was not available to US citizens.
- On 26 September Mr Rubenstein also returned the signed FEEPAY Form to HSBC. The Form began with the following statement:
- The sum of £1.25 million was transferred from Mr Rubenstein's account to AIG life on or about 26 September. On 29 September 2005, the bank sent the PAB policy document to Mr Rubenstein confirming his investment in the EVRF and the bond number (0021460).
- Except for one brief interlude, the whole of the £1.25 million remained invested in the EVRF from September 2005 until September 2008. The interlude was when, in February 2007, Mr Rubenstein withdrew £130,000 from the bond, which he planned to use as the deposit on a property for which he and his wife had made an offer. In the event the purchase did not proceed and in May 2007 Mr Rubenstein wanted to put the money back into the EVRF. Under the terms and conditions of the bond this was treated as a "top-up", and it required Mr Marsden's signature on the form because he had been the IFA through whom the bond was taken out. The Rubensteins otherwise had little contact with the bank about their investment, save in connection with the monthly payments of interest.
- In the week beginning Monday, 15 September 2008 all that changed. During the previous week the financial position of Lehman Brothers, which had earlier in the year reported huge losses arising from the U.S. sub-prime mortgage market, became untenable. The U.S. Government declined to provide support. The stock price plunged and clients of Lehman Brothers began withdrawing their money. Other major financial institutions in the U.S. were coming under similar pressure. They included Merrill Lynch and AIG. The queue of investors in these companies who were heading for the exit increased dramatically when, on 15 September, Lehman Brothers filed for Chapter 11 bankruptcy protection.
- Seeing the storm brewing over the intervening weekend, Mr Rubenstein moved swiftly on the morning of 15 September to withdraw his funds from the EVRF. He began by faxing an application to AIG Life to withdraw all of his money: but he did not have the original bond to hand and was told by AIG Life that he could not surrender the bond in its entirety. Immediately, he amended the application to one withdrawing all save the minimum permissible investment amount of £100,000. On the latest valuation available that equated to a withdrawal of £1,194,076.26. Early in the afternoon of 15 September, he received confirmation from AIG Life that his application was being processed. Then, sometime after 5.30pm, AIG Life forwarded to him the following statement, in an e-mail to which a copy of the PAB policy conditions was attached:
- Mr Rubenstein had noticed the reference to the right to suspend in the key features document: but the suspension still came as a shock. In the days following, he and his wife, and also his father, tried telephoning AIG Life to find out what was happening. Mr Rubenstein also telephoned Mr Marsden. It is possible but not certain that he spoke to Mr Marsden on 17 September and got from him a statement that the maturity date of the investments in the EVRF was no more than 11-19 days. If so, this was a misunderstanding because about 60% of the assets were of a maturity up to 6 months and about 20% of a maturity of 2 years or more. When Mr Rubenstein eventually made contact with the Head of Operations at AIG Life (Stuart McWatt), he was told that the EVRF had been suspended because assets were having to be sold well before their maturity date to meet investor withdrawals and this was causing a big loss.
- On 22 September HSBC forwarded to Mr Rubenstein another announcement from AIG Life which was that the EVRF would be closed on 15 December 2008, i.e. at the end of the three month suspension. The decision to close the EVRF was being taken in the interests of policyholders because of the large volume of requests to withdraw money invested in it. The announcement continued:
- After reading the announcement Mr Rubenstein rang Mr Marsden and complained that he had been mis-advised, because he wanted protection of his capital and his capital was now under threat. Mr Marsden suggested that he make a formal complaint. Mr Rubenstein did so by e-mail the next day and followed this up by drafting a letter of complaint which he instructed a London law firm, called Schillings, to send on his behalf around the beginning of October. In the meantime he and his wife were vigorous in pursuing AIG Life for an explanation of what had gone wrong. Mrs Rubenstein wanted to know why the EVRF did not have the cash to meet all of the demands of investors, and was keen to discover what assets were held within the EVRF. She was told that the list of assets was confidential, but she was sent a copy of the August Newsletter for the PAB in which the pie chart of asset spread within the EVRF showed that 2% of the total consisted of securities with a risk rating of Baa rather than A or better. The accompanying report provided the following explanation:
- The scheme announced by AIG Life on 22 September provided for an initial switch of 50% of each investor's holding from the EVRF to the SVRF. The balance was to remain invested in units in the EVRF until 15 December when the units could either be sold and the PAB surrendered altogether or they could be transferred into the new replacement fund ("the Protected Recovery Fund" or "PRF"). AIG Life called the former "the Exit Plan" and the latter "the Maturity Plan". The first phase of the scheme was completed on 3 October. On that date, Mr Rubenstein's investment in the EVRF was recorded as having a total value of £1,293,614.10. A sum equivalent to half that amount (£646,807.05) was switched into units in the SVRF in his name. Mr Rubenstein then had to decide what to do with the second half of his investment. He had to opt between the Exit Plan and the Maturity Plan or a combination of the two. There was also a Conditional Exit Plan which does not matter for present purposes.
- AIG Life provided a leaflet explaining what the Exit Plan and the Maturity Plan entailed. What follows is no more than a paraphrase of what I understand the leaflet to have said. No issue arises in this case about the course which Mr Rubenstein decided to adopt, and so the precise terms of the Exit Plan and the Maturity Plan were not the subject of argument.
- The Exit Plan involved transferring the remaining units from the EVRF to the SVRF at a price set by the proceeds achieved from selling enough of the assets in the EVRF to meet the demands of policyholders choosing the Exit Plan and then encashing the corresponding number of units in the SVRF. It was estimated by AIG Life that this exercise would result in policyholders receiving back no more than 50% to 80% of the value of the second half of their investment. The Maturity Plan meant transferring the remaining units and corresponding assets from the EVRF to the PRF, subject to a guarantee (referred to by AIG Life as "the Underpin"). Once in the PRF, the assets would be managed and income derived from them accrued to the fund until 1 July 2012 ("the Maturity Date"). On that date AIG Life would decide whether to liquidate the PRF, and would probably do so if, as expected, most of the assets had by that time matured. The Underpin was that AIG Life promised to continue increasing the price of units in the EVRF between 3 October and 14 December 2008 by applying crediting rates in the normal way and guaranteed that the encashment value of units on 1 July 2012 would be no less than the value of the investor's units in the EVRF as at 14 December 2008, i.e. immediately prior to the switch into the PRF. It would appear that the intended effect of the Underpin was that if the second half of any investment transferred into the PRF was held until the Maturity Date, it would suffer no loss in capital value. In addition it would benefit from any increase in the value of units in the PRF between 16 December 2008 and 1 July 2012 resulting from income earned on the assets in the fund.
- On 27 October, Mr Rubenstein withdrew the first half of his investment from the SVRF. On 24 November, he opted for the Exit Plan in respect of the second half, but not before his present solicitors (Clarke Willmott) had written a letter of claim under the professional negligence pre-action protocol inviting the bank to accept an assignment of this part of Mr Rubenstein's investment in the PAB in return for a payment of compensation involving no capital loss. That invitation was declined. Under the Exit Plan, Mr Rubenstein received a sum of £469,472.84. On the face of it, that represented a capital loss of £179,530.17. But the claim eventually pleaded in this action was for a sum of £186,612.87. This is alleged to be the net loss after tax which Mr Rubenstein suffered, when comparing the total return he received from the investment in the PAB and what would have been earned if the money had been placed in a deposit account over the same period.
- In assisting Mr Rubenstein to make his investment, Mr Marsden was bound to observe the requirements of the statutory and regulatory regime governing the conduct of investment business by IFAs. The terms of that regime are not in dispute. How exactly it applied to the transaction in this case is controversial. The issue, in a nutshell, is whether the transaction was an "execution-only" transaction or an advisory one.
- The giving of investment advice is a regulated activity under Part 1 of Schedule 2 to the Financial Services and Markets Act 2000 ("FSMA"). Advising on investments is defined in Article 53 of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (2001 S.I. No. 544) as follows:
- Where investment advice is given, the FSA's Conduct of Business Rules apply. The Conduct of Business Rules ("COB" for short) are rules made by the FSA under the general rule making power conferred by section 138 of FSMA (Part X Rules and Guidance). COB are to be found in the FSA Handbook. In November 2007, COB were replaced by the Conduct of Business Sourcebook ("COBS"), the provisions of which were very similar. However, COB rather than COBS applied when Mr Rubenstein made his investment.
- The provisions of COB are divided into "Rules" and "Guidance". Guidance includes provisions which are "Evidential". Rules are mandatory ("a firm must ..."). Guidance is precisely that ("a firm should ..."). Breach of a Rule gives rise to a statutory right of action by virtue of section 150 of FSMA, aside from any right of action which may arise for breach of contract or in tort. Section 150 of FMSA provides:
- The following provisions of COB are potentially relevant in this case (the suffix letters R, G and E denote Rules, Guidance and Evidential):
- There was additional guidance available to financial advisers in the FSA's Perimeter Guidance Manual ("PERG"). The guidance in PERG is provided for the benefit of any interested individual, and not just professionals engaged in the financial services industry. The status of the guidance is explained in PERG 3.1:
- PERG 5.8 relates specifically to advising on contracts of insurance. PERG 8 governs "Financial promotion and related activities". The following passages are material because they address the distinction between the giving of advice and the giving of information:
- The claimant's case is that the bank, through Mr Marsden, advised him to put his money in the EVRF. That advice was negligent and given in breach of COB. The investment was not as safe as a cash deposit and it was not the most suitable investment for his personal circumstances. He relied on Mr Marsden's advice in taking out the bond and has suffered loss in consequence. The bank is liable to make good that loss in damages for breach of contract and for negligence and also, under section 150 of FSMA, for breaches of COB.
- It is common ground that a contract was entered into, but not when. It is also common ground that Mr Marsden and the bank owed a duty of care in tort to Mr Rubenstein in doing whatever they did or were required to do in effecting the transaction. Beyond that, everything is in issue. The bank denies that advice was given. It says that Mr Marsden only provided information about the PAB. Mr Rubenstein made the decision to invest in the PAB and the choice of the EVRF was his. Even if that is wrong, and Mr Rubenstein made his investment as a result of advice given by the bank, the advice was accurate when it was given. The EVRF was as safe as a cash deposit and remained so until only a matter of days before withdrawals were suspended on 15 September 2008. If Mr Rubenstein has suffered loss, that loss was caused by the extraordinary and wholly unprecedented turmoil in the financial markets following the collapse of Lehman Brothers and not by any error in advice given when the bond was taken out 3 years earlier. Further or alternatively, the loss was not reasonably foreseeable and is too remote to be recoverable.
- I should also record at this point arguments which are not raised or which were once raised but which are no longer pursued. There is no claim by Mr Rubenstein for damages for misrepresentation and there never has been. Mr Virgo, counsel for Mr Rubenstein, would no doubt contend that there was no need of one. It was at one time part of Mr Rubenstein's case that the PAB was a collective investment scheme which the bank was prohibited by statute from promoting. The bank has always hotly contested that the PAB was a collective investment scheme, and the allegation was dropped. Last but not least I have already said that Mr Rubenstein is not alleging that HSBC was under a continuing duty to advise him as to the suitability of the EVRF after September 2005 and was negligent in not warning him to withdraw his investment before 15 September 2008. An attempt was made to raise that issue by an amendment to the particulars of claim: but the amendment was eventually withdrawn. Failure to warn may be an issue in other cases: but it does not arise in this one.
- On the part of HSBC, it was pleaded that Mr Rubenstein failed to act reasonably to mitigate his loss when he decided not to switch the second half of his investment into the PRF. However, Mr Stephen Cogley Q.C., counsel for the bank, abandoned this argument during the trial.
- Aside from the factual evidence of Mr and Mrs Rubenstein and Mr Marsden, I heard evidence from experts in two fields. There was actuarial evidence about the constitution of the PAB and the profile of the two variable rate funds, and there was evidence from two experts in financial services and in the duties and responsibilities of an IFA in the position of Mr Marsden. I should say at once that in my opinion this is not a case which depends on the credibility of the witnesses of fact. There were a few controversial issues, such as whether Mr Rubenstein spoke to Mr Marsden once or twice on 22 September, but I have already made my findings about them and in the view I have taken they were not critical. The impression I gained of both Mr and Mrs Rubenstein and Mr Marsden in giving their testimony was that they were honestly trying to recollect the exchanges that occurred, for the most part more than 5 years previously.
- Mr Rubenstein's actuarial expert was Mr Muhammad Iqbal, who is known in the industry as Icki Iqbal. It was common ground that he is the doyen of actuaries who specialise in the field of life assurance and pensions and his pre-eminence was not challenged by Mr Cogley. The defendant's expert was Mr Solomon Green, also an experienced actuary, but less experienced than Mr Iqbal when it came the structure of unit-linked funds within a life insurance wrapper, and so prepared to defer to Mr Iqbal on those matters. I intend no disrespect to their undoubted and very considerable expertise when I say that I did not find that their evidence (about most of which they were in any case agreed) added a great deal.
- I can summarise their evidence very shortly. Mr Iqbal's brief was to express an opinion on the differences between the EVRF and the SVRF, on the EVRF's unit pricing mechanism and on whether the EVRF was fairly described in the product literature provided to Mr Rubenstein and in what Mr Marsden said to him. On the first, he agreed that the difference between the two funds lay in the underlying assets. As to these, he had no more information than that contained in the AIG updates. Of both funds his opinion was that "AIG Life's investment policy was not without risk and this risk was downplayed". As to unit pricing, he highlighted that the methodology used was only loosely based on market value and that the Policy Conditions and Fund Rules accorded to AIG Life a right to charge overheads and expenses to the fund the extent of which was in his experience unprecedented. On the issue of fair description, his opinion was that the product literature minimised the fact that the higher yield of the EVRF entailed higher risk, and that Mr Marsden should have had a discussion about fund selection with Mr Rubenstein.
- Mr Green accepted that it could be argued that the EVRF carried a "marginally higher" risk than an HSBC deposit account. However he pointed out that both HSBC and ALICO were rated AA as companies, and that a bank's promise to repay money deposited was only as valuable as the bank's creditworthiness, which in turn depended on how the bank had invested depositors' money. In his view Treasury bills and municipal securities were considered more secure than cash deposits. In any case, in August 2008, the EVRF had held 44.8% of its assets in cash or cash deposits of less than 30 days' duration. This was equivalent to about £2,588 million of the fund's total value. By that calculation Mr Rubenstein's capital was covered 1,999 times by freely marketable cash deposits alone. Mr Green's conclusion was that there could have been no doubt in September 2005 as to the security of the EVRF and Mr Marsden's explanation of the risk in investing in the EVRF was accurate. He could see nothing, other than with the benefit of hindsight, to suggest that in September 2005 there was any risk to Rubenstein's capital in the EVRF, certainly not looking forward over a 3-12 month period. None of these points in Mr Green's report was recorded as disagreed in the joint statement which he and Mr Iqbal signed. Mr Iqbal was asked whether the joint statement set out the full extent of his disagreement with Mr Green's evidence, and he said that it did. It follows that Mr Iqbal had no quarrel with the views I have summarised in this paragraph.
- The two financial services experts were Dr Jane Thompson for Mr Rubenstein and Mr Marcus Egerton for HSBC. While both had a great deal of experience in the financial services industry, Dr Thompson's experience in the last 10 years had been as a practising IFA, whereas Mr Egerton, although on the FSA Register throughout that time, was only approved to be a director of a financial services company. However Mr Egerton had been concentrating on compliance issues for rather longer than Dr Thompson, even if he had not been at the "coal-face" dealing on a daily basis with clients seeking to buy products or to invest. Both counsel tried to establish that their financial services expert had more of the relevant experience, but I think honours were roughly even on that score. I will return to the evidence of Dr Thompson and Mr Egerton where it arises under the following headings. The headings cover the main points argued.
- Mr Cogley submitted that there was no advisory relationship between Mr Rubenstein and the bank until there was a contract between them. There could be no contract until the fee for the bank's services had been agreed. It was not agreed until 26 September when Mr Rubenstein faxed the FEEPAY Form back to HSBC. By then, the investment in the PAB had been made and Mr Marsden was away on holiday. It followed, in Mr Cogley's submission, that any error made by Mr Mardsen in giving any advice on 24 August or 22 September could not give rise to a claim for breach of contract.
- This argument is not, necessarily, a complete answer to the claim. The regulatory regime of COB can apply to exchanges between an adviser and a client whether or not a contract has come into existence between them. Moreover, if Mr Marsden did give advice to Mr Rubenstein on 23 August or 22 September, Mr Virgo contended that the context was such that Mr Marsden owed a duty of care in giving that advice and the bank would be liable in tort if the advice was negligent. However, the principal claim is for breach of contract and the point raised by Mr Cogley is of some importance because, although Dr Thompson said that she would never give advice until the client had agreed to the basis and amount of her fee, it must often be the case that the fee only gets agreed when the client has decided to proceed with a transaction based on a recommendation that the adviser has already made.
- COB 4.2.5 required the adviser's terms of business to be provided in good time before the business was conducted. Mr Marsden forwarded the bank's Terms of Business to Mr Rubenstein as an attachment to his second e-mail of 23 August. This was before the important exchange about risk. The Terms began by saying:
- However the view I take is that the initial e-mail exchange on 24 August did not amount to an agreement of that nature. Mr Rubenstein may believe that he agreed on 24 August to pay the minimum fee of £1,500; but I do not think that his message equating a commission-based fee to 37 hours of work at the hourly fee rate amounted to a promise to pay a fee on either basis. In my judgment there was no contract before 22 September, when Mr Rubenstein told Mr Mardsen that he wanted to proceed with the investment and Mr Marsden responded by returning the appropriate forms.
- Whether a binding contract arose on 22 September or only when the FEEPAY Form was sent back is academic. Although Mr Rubenstein accepted that he was free to walk away from the transaction until 26 September, that is not necessarily the test of whether he was bound. It was possible for there to have been a contract before 26 September which was subject to a condition subsequent that if no transaction was concluded, any agreement to pay the bank in accordance with its Terms of Business would cease to have effect. The question is academic because I am satisfied that the eventual contract, on 22 or 26 September, was one entered into as a result of what had been said by Mr Marsden in the e-mail exchanges and telephone conversations between 22 and 24 August and on 22 September. If what was said amounted to advice, the advice itself became a matter of contract. I am inclined to think that the legal analysis is that the advice constituted a collateral contract, the consideration for which was the engagement of the bank to effect the transaction and the agreement to pay the bank's minimum fee. In my judgment it is not necessary to found a claim in contract against the bank for negligent advice that Mr Rubenstein should have become contractually bound to pay the bank's fee before the advice was given, provided he agreed to pay that fee and to enter into the transaction in consequence of the advice.
- Mr Cogley referred to the judgment of Gloster J in J.P. Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm) where she held, at paragraph 434, that the absence of a written advisory agreement is a strong pointer against the existence of a free-standing duty of care to give investment advice. He referred also to the judgment of Eady J in Wilson v MF Global UK Limited [2011] EWHC 138 (QB) where he held (in particular at paragraph 94, 96 and 105) that the mere fact that a financial adviser may express an opinion does not mean that an advisory relationship has come into being (see also Flaux J in Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm) at paragraphs 198-199). But the relationships between adviser and client in those cases were factually very different. They were all experienced investors who conducted transactions through their investment managers over a substantial period of time on an execution only basis, and who from time to time had received expressions of opinion about categories of investment which, in isolation, could be construed as advice. The present case concerns a one-to-one inquiry about a specific investment transaction. If advice was given by Mr Marsden, which led to a transaction being concluded on the basis of that advice, I see no obstacle, in terms of proximity or assumption of responsibility in the Hedley Byrne [1963] UKHL 4 /Henderson v Merrett [1994] UKHL 5 sense, why a duty of care would not have been owed at the time the advice was given, or why subsequently the advice should not have acquired contractual force when the contract was entered into.
- The distinction is fundamental. Ultimately it depends on what was said and what was done by the adviser, although clues may lie in the nature of the client's inquiry and in the process which was followed. I deal here with the process, which cannot be more than a pointer. Under the next two headings I shall consider what constitutes "advice" and whether advice was in fact given.
- Mr Cogley relied on the fact that nothing was said by Mr Rubenstein or by Mr Marsden about whether the contract was to be "advisory" or "execution only" for the inference that it was "execution only". But Dr Thompson and Mr Egerton were agreed that advisory relationships are much more common than execution only relationships and that most private clients, if they understood the significance of the distinction at all, would say that they expected their relationship with a financial adviser to be an advisory one. In the circumstances, there can be no default presumption that the contract is "execution only", if the distinction between the giving of advice and the provision of information is not expressly addressed. I accept Dr Thompson's view that the onus was on Mr Marsden to clarify the position if it was at all unclear.
- It is unlikely that Mr Rubenstein understood the distinction between an advisory and execution only contract; but Mr Marsden certainly did. HSBC had a Non-Advised Sales Process under which a Non-Advised Instruction Form ("NAIF") was to be issued in the case of an execution only transaction. The distinction between advice and non- advice appeared also in the choice of services in section 3 of the "Key Facts about our services" document. The problem is that no one ticked the non-advice box for Mr Rubenstein. The Non-Advised Sales Process was not followed. A NAIF was not issued. The FEEPAY Form was incorrectly filled in as indicating that an advisory service was being provided. Ms. Mead completed an internal Investment Services Centre ("ISC") Despatch Form for the bank's Investment Services Centre in Southampton, which described the "Business Type" as "Advised".
- Mr Cogley and Mr Egerton say that these were errors by Mr Marsden and his colleagues. They were errors because, in truth, Mr Marsden provided no more than an execution only service. Nevertheless they were errors which Mr Marsden compounded in his e-mails. He told Mr Rubenstein on 24 August that it was unlikely he would need "further advice" (see paragraph 28 above). He also promised on 22 September to send Mr Rubenstein a letter of recommendation. Mr Marsden tried to say that the letter would simply have recommended an execution only transaction. That explanation is wholly unconvincing and has all the hallmarks of a post-event rationalisation. I agree with Dr Thompson and Mr Egerton that a letter of recommendation meant a suitability letter (see COB 5.3.14R). Such a letter would normally only be appropriate in an advisory transaction. The bank even had a template wording for clients to whom it had recommended investment in the EVRF. The wording read:
- All these mistakes strongly suggest that the contract with Mr Rubenstein was being treated by the bank as an advisory one. There was one significant omission which points the other way. If the relationship was advisory in the full sense, a fact find or KYC (Know Your Customer) document would have been completed in order to meet the requirements of COB 5.2. This should have been a matter of habit for Mr Marsden since the great majority of transactions executed by him on behalf of the bank were advisory. In this case no KYC document was compiled. Mr Marsden did not obtain a full risk profile from Mr Rubenstein. However he learned from Mr Rubenstein most of what he needed to know. The only aspect of Mr Rubenstein's circumstances which was not investigated, but which would have been investigated during a full fact find process, was his tax status and that of his wife.
- The bank relies on the absence of a KYC document as proof that Mr Marsden always regarded the relationship as "execution only". I do not think that inference can be drawn. There would not necessarily be a full fact find if the transaction was one of limited advice. However, transactions resulting from limited advice are not to be treated as execution only transactions (COB 5.2.3G).
- The best that Mr Egerton could say was that, if he had been asked to review the file for compliance, he would have wanted disciplinary action taken against Mr Marsden for not clarifying that the transaction was being treated by him as "execution only". That evidence assumes that Mr Marsden really did intend the transaction to be execution only. My conclusion is rather different. I think that Marsden devoted insufficient thought to whether the transaction was an advised one or not. A bystander, reading Mr Marsden's e-mails to Mr Rubenstein and the bank's records of how the transaction was processed would conclude that it was being treated as advised rather than as execution only. That impression would have been confirmed by reading the letter which the bank's Senior Regulated Complaints Manager wrote on 17 October 2008 in reply to the letter of claim which Mr Rubenstein asked Schillings, to write on his behalf. The letter did not say that the bank had only agreed to provide, and had only provided, an "execution only" service. It said:
- I was referred to only two cases in which a judicial attempt has been made at defining the distinction between the giving of advice and the provision of information.
- In Martin v Britannia Life Limited (21/12/99 unrep.), BAILII: [1999] EWHC 852 (Ch) Jonathan Parker J was concerned with the meaning of the phrase "investment advice" in paragraph 15 of schedule 1 to the Financial Services Act 1986. a representative of an insurance group had given advice to Mr and Mrs Martin about entering into a package of transactions which consisted of a remortgage of their home, the surrender of a number of life policies which had been charged as collateral security for the existing mortgage, the taking out of a new endowment policy and a new pension policy, and the charging of the endowment policy as security for the remortgage. The defendant's argument was that advice as to the remortgage was not "investment advice" for the purposes of the 1968 Act, because the remortgage did not constitute "investment business" for the purposes of the Act. The judge rejected that argument and said (paragraph 5.2.5):
- Henderson J adopted that approach in Walker v Inter-Alliance Group plc [2007] EWHC 1858, which was another case under the 1986 Act. He said at paragraph 30:
- It should be noted that in both cases it was conceded that advice of some kind had been given, so technically these judicial observations were obiter. They are consistent with, but do not add much to, what is said in PERG 5.8.8 and 5.8.9, 5.8.11 and PERG 8.28 and 8.29 about the distinction between giving investment advice and providing information. In both instances information is provided, and in both instances the client has a choice as to what he decides to do with that information. The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client's investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.
- To attempt any greater definition of the giving of advice in an investment context would be unwise and is probably impossible. I suggest, however, that the starting point of any inquiry as to whether what was said by an IFA in a particular situation did or did not amount to advice is to look at the inquiry to which he was responding. If a client asks for a recommendation, any response is likely to be regarded as advice unless there is an express disclaimer to the effect that advice is not being given. On the other hand, if a client makes a purely factual inquiry such as "What corporate bonds are currently yielding X%?" or "How does this structured product work?", it is not difficult to conclude that a reply which simply provides the relevant information is no more than that.
- The test is an objective one. It is irrelevant whether Mr Marsden thought he was only providing information or whether Mr Rubenstein thought he was being given advice. The question is whether an impartial observer, having due regard to the regulatory regime and guidance, and to what passed between the parties, would conclude that advice had been given. Adopting that approach, I am in no doubt that Mr Marsden gave advice to Mr Rubenstein. He recommended the PAB and the EVRF.
- Mr Cogley sought to resist that conclusion on the basis that the exchanges between the two men were very brief. They were confined to no more than a handful of telephone conversations and emails between 22 and 24 August 2005, and to one telephone conversation and one email on 22 September. No KYC document was completed. There were no comparisons made between different products or between funds in the PAB. The product brochure and Key Features document were provided as information, not as part of any advice that the PAB was suitable for Mr Rubenstein's needs.
- I cannot accept this argument. Mr Rubenstein began by asking for a recommendation. He wanted to know what Mr Marsden could suggest as a short-term home for his money, involving no risk to the capital and providing a better rate of return than he had seen on the internet. Absent an express disclaimer, any response to such an inquiry naming a particular product would constitute advice because it would imply that Mr Mardsen was of the view that the product met the criteria. A value judgment would be implicit in the response. As it turned out, Mr Marsden mentioned only one product, which was the result of a two stage process of selection. First, the PAB was a panel product which had been approved by the bank's Product Research Team. Second, Mr Marsden had chosen it, in preference to the Cardiff Pinnacle bond, as being the panel product which in his view best suited Mr Rubenstein's requirements. Seen in that context, the product brochure and key features document were information about a recommended product and so part of the recommendation and part of the advice.
- Mr Marsden then went further in his last email on 24 August ("We view this investment as the same as cash deposited in one of our accounts …"). Mr Egerton said that if this statement represented only the bank's view, it was factual information, but if it represented Mr Marsden's own reasoned opinion, it was not simply providing factual information. One might be forgiven for wondering how Mr Rubenstein was expected to tell the difference. I agree with Dr Thompson that the phrase "In our view …", whether coming only from the bank or from the bank and Mr Mardsen, was the expression of a value judgment and amounted to advice. In fact I read that sentence as expressing both the bank's opinion and that of Mr Marsden. He was endorsing the bank's view and adopting it for himself as the party line. In any case the rest of the message was clearly expressing his own opinion about the level of risk in the EVRF. Mr Marsden accepted in cross-examination that a lay person would have understood that what passed between him and Mr Rubenstein amounted to advice. I am satisfied that is how Mr Rubenstein understood it. In my judgment it was advice.
- In Loosemoore v Financial Concepts [2001] Lloyds PN LR 235 at 241, Judge Jack QC (as he then was) held in this court that failing to comply with the FIMBRA Rules was negligence because the skill and care to be expected of a financial adviser would ordinarily include compliance with the rules of the regulator. As a general proposition that must be right, and it was not suggested that Mr Marsden was not negligent if he breached the rules in COB. If, therefore, the right analysis is that the relationship between Mr Marsden and Mr Rubenstein was an advisory one, the scope of the duty which Mr Marsden owed to Mr Rubenstein in contract and in tort embraced the relevant requirements of COB, in particular as to the suitability of the product he was recommending him.
- Mr Cogley submitted that, if what was said amounted to advice, the advice was correct at the time it was given, and that, with hindsight, it held good for the period of time that it was anticipated the investment would be held. In fact, the EVRF remained a safe haven for Mr Rubenstein's cash until 2008. He accepted that the EVRF involved a slightly higher risk than either the SVRF or a conventional bank or building society deposit: but said it was axiomatic that there was no such thing as an investment without risk and that there was a trade-off between the level of risk and the rate of return. The EVRF offered a gross return of 5.56% (3.42% net to a higher rate taxpayer). The HSBC Premier deposit account offered a gross return of 3.75% (2.25% net of tax at the higher rate). The gross return on the EVRF was therefore 48% higher than the return from an HSBC deposit. It would have been obvious to Mr Rubenstein that the higher rate of return came at a price. The price was a slight increase in risk. Mr Cogley also invited me to find that Mr Rubenstein had not expressed his desire for capital protection and his desire for income in any order of priority. Mr Marsden had been right to view Mr Rubenstein as a rate chaser, who cared less about the security of the deposit taker than the rate that was on offer.
- These submissions encapsulate a number of points. First and foremost, I disagree that Mr Rubenstein was primarily a rate chaser. The context of his approach to Mr Marsden was that he wanted to find a temporary income-earning investment for the proceeds of sale of his home, which he was shortly going to use to buy a new home. This was not investment capital: it was capital needed for a new property to live in. True he said that he was looking for a better interest rate than was available from the deposit accounts he had seen advertised: but he made it quite plain on 24 August that he and his wife could accept no risk to the capital. No risk to capital (which I interpret as meaning "the minimum possible risk") was to be a sine qua non of the investment. Second, as to the trade-off between risk and return, it is important not to lose sight of the advice which was given, namely, that an investment in the EVRF was the same as cash deposited with HSBC and that the risk of default of one of the securities held within the EVRF was similar to the risk of default of Northern Rock. The first of these statements glossed over the structural differences between an investment in the EVRF and a cash deposit. These differences were significant and had a direct bearing on the risk.
- A bank is under a contractual obligation to repay the principal sum deposited plus any interest which has accrued, when a demand for repayment is made. There was no equivalent obligation under the terms of the PAB. Subject to the right of suspension of withdrawals, AIG Life agreed to implement instructions to encash units at whatever value they might have at the date of the instruction. That value was dependent on the actuarial process of valuing unit prices, which was itself dependent on the amount of cash within the fund and the value of the underlying securities in the secondary market. Liquidity was relevant to the exercise in two senses (1) in the length of time to maturity of the underlying assets, and (2) in the value of the longer-dated securities in the secondary market. Since the EVRF held a greater proportion of longer-dated securities (i.e. securities with more than 6 months left to run until maturity) than the SVRF, the warning about "Adjustment to unit prices" in the event of there being a large number of withdrawals was more pertinent in the case of the EVRF than in the case of the SVRF. The EVRF was less liquid.
- Mr Egerton pointed out that banks and building societies used depositors' funds to invest and said that in doing so they faced the same counterparty risks as AIG Life. If he meant by that to say that the risk of a bank being unable to repay a cash deposit was the same as the risk of AIG Life being unable to return the original capital when cashing units in the EVRF, I cannot agree. The only risk faced by a depositor of cash at a bank is that, by virtue of imprudent management, the bank itself may fail. A bondholder in the EVRF not only took the risk that AIG Life might fail but also a risk that the value of his units could fall as well as rise, depending on market conditions. Mr Green's evidence was that in many quarters Treasury bills and municipal bonds are regarded as safer than cash. By contrast Dr Thompson was firmly of the opinion that, in general, cash is lower risk than cash derivatives. I regard Dr Thompson's view as of greater relevance to the present case. There may be situations in which sovereign debt instruments are regarded as safer than cash (although at the time of writing this judgment even that proposition may be open to question): but even in September 2005 Mr Rubenstein's capital would have been safer in a cash deposit with HSBC than in the EVRF. The spread of assets held by the EVRF was wider than Treasury bills and municipal bonds. It included money market instruments or "commercial paper" linked to securitised loans in the U.S. sub-prime mortgage market and the buy-to-let mortgage market. Whilst in 2005 the degree of risk attaching to these instruments was thought to be very low, and whilst it is doubtful that HSBC had more than a general notion of the kind of bonds which were included in the portfolio of the EVRF, the bank would have realised that the underlying assets were not confined to Treasury bills and bonds of that character. The first part of the advice given to Mr Rubenstein was that an investment in the EVRF was the same as cash deposited. That was not correct. The structure of the investment was materially different and the risk was commensurately greater.
- However, the second part of Mr Marsden's advice, that the risk of default of one of the securities held within the EVRF was similar to the risk of default of Northern Rock, was probably true. At the time Northern Rock was regarded as a responsible bank. It had a credit rating which was equivalent to the minimum credit rating of the assets in the EVRF. Moreover the spread of the portfolio of the EVRF meant that the risk to a bondholder of one of the A rated assets in the EVRF going into default was far lower than the risk to a depositor at Northern Rock if Northern Rock defaulted.
- The question is whether Mr Marsden was negligent in recommending the EVRF to Mr Rubenstein. The threshold test for the negligence of a professional is often expressed as being whether no reasonably competent IFA, in the position of Mr Marsden, could have advised that the EVRF was suitable for Mr Rubenstein. That is not necessarily the same as asking whether reasonable care was taken in recommending the EVRF to Mr Marsden, because reasonable care might not have been taken but a competent adviser exercising all reasonable care would still have given the same advice. Indeed it is the bank's case that Mr Marsden would have made precisely the same recommendation even if a full KYC document had been completed and all requirements of COB for an advisory service had been followed to the letter.
- The conclusion I have reached, although not without some hesitation, is that Mr Marsden was negligent in recommending the EVRF as being suitable for Mr Rubenstein. There were a number of breaches of the procedural requirements of COB, which I shall refer to shortly. They do not necessarily lead to the conclusion that the recommendation itself was inappropriate; but the procedure in COB is designed to ensure that the right advice is given. So the rules about process and about suitability cannot be viewed in isolation from each other. There are two reasons why I consider that the advice given by Mr Marsden was not given with reasonable care. The first is that it was wrong of Mr Marsden to suggest that the EVRF was the same as a cash deposit. The second is that Mr Marsden made no attempt to consider the other funds in the PAB as possible alternatives. As to the first of these criticisms, I recognise that Mr Marsden was responding to a question from Mr Rubenstein about risk and that it may have been right to say in September 2005 that an investment in the EVRF was very safe and only marginally more risky than a cash deposit. But it was not the same as a cash deposit. The differences were not adequately explained and they should have been. As to the second criticism, Mr Marsden admitted that he did not investigate the other funds and what they had to offer. He put forward the EVRF because of the interest rate. It was his duty to examine the alternatives within the PAB and he should have done so. If he had looked at the alternatives and had given proper weight to Mr Rubenstein's attitude to risk, he would in my view have concluded that the SVRF was more suitable than the EVRF, even in the circumstances prevailing in September 2005.
- The phrase "limited advice" is not defined in the Glossary of the FSA Handbook. It is not therefore a term of art in the regulatory regime. It must be given its ordinary dictionary meaning or its meaning in common parlance. I take it to mean partial advice, in contradistinction to full advice based upon sufficient personal and financial information. Since Mr Marsden did not complete a KYC document, it might be said that the advice he gave in this case was limited advice. Neither of the financial services experts addressed this possibility in their reports. I recorded Mr Egerton as suggesting in cross-examination that if limited advice was given, the suitability rules in COB applied to the product, but only to a limited extent to the client. I am not sure I understand that answer. COB 5.2.3G states that any transaction arising from limited advice should not be treated as an execution only transaction. It follows that it should therefore be treated as an advised transaction. I can see nothing in COB which says that a firm or adviser providing limited advice is exempted from any of the rules in COB 5.2. That being so, the bank was in breach of COB 5.2.5R, COB 5.2.9R and COB 5.2.12R. It was also in breach of COB 5.3.14R because the promised suitability letter was never sent. On the bank's case these breaches were not the cause of any loss because it says that, even if these rules had been observed, Mr Marsden would have made the same recommendation. I will come back to that submission when I consider damages.
- Dr Thompson and Mr Egerton were both of the opinion that the bank was also in breach of COB 2.1.3R (the "clear, fair and not misleading" requirement), but for different reasons – Dr Thompson because the advice that an investment in the ERVF was the same as cash was misleading: Mr Egerton because Mr Marsden should have made plain that he was seeking only to provide information as to the view which the bank held about the risk attaching to an investment in the EVRF. I agree with Dr Thompson that there was a breach of COB 2.1.3R for the reason she gave.
- However the rule that really matters, as I have already said, is COB 5.3.5(2). An investment in the EVRF was a packaged product because it included life cover. It was therefore required to be "the most suitable" from the range of packaged products on which the bank held itself out as giving advice (i.e. those on the panels approved by the Product Research Team). Mr Egerton accepted that the SVRF was more suitable for Mr Rubenstein in terms of risk but was not prepared to say whether it was more suitable overall or the most suitable. Even without the benefit of hindsight, I think it is possible to say that the SVRF would have been a more suitable home for Mr Rubenstein's money than the EVRF. That conclusion is enough to establish that there was also a breach of COB 5.3.5(2)R.
- Mr Cogley submitted that Mr Rubenstein went into the purchase with his eyes open. He signed the Investor Declaration in the Application Form (see paragraph 35 above). The very searching inquiries which he and his wife pursued of AIG Life in the days following the suspension of the EVRF demonstrated that he had a good grasp of the constituents of the EVRF and of the policy conditions and the different types of securities held in the EVRF. If there was any negligence in the giving of the advice, Mr Rubenstein was not misled by it as to the level of risk of investing in the EVRF.
- The first thing to be said is that this is not a case where Mr Rubenstein subscribed to any statement or was bound by any term, such as the Risk Disclosure Statement in Peekay Intermark v Australia & New Zealand Banking Group [2006] 2 Lloyds Rep 511, or clause 25 of the GMRA in the Springwell case (see the discussion in paragraphs 474- 568 of the judgment of Gloster J.), whereby he acknowledged that he relied on his own judgment rather than any advice given to him. Second, one must not lose sight of the fact that the principal issue is whether Mr Marsden exercised sufficient skill and care in recommending the EVRF to Mr Rubenstein and in ensuring that it was the most suitable product for him in accordance with COB 5.3.5R. The adviser's skill lies in matching the product to the client's needs and circumstances. If the wrong product is recommended, and loss is suffered because the client chooses to invest in it, it does not follow that the recommendation did not cause the loss simply because the client said that he understood its key features. The third point is really a corollary of the second. Mr Rubenstein's understanding of the key features of the EVRF is not what matters. What matters is whether he properly understood the risk. It was Mr Marsden's obligation to make sure that he did (see COB 5.4.3R and COB 5.4.7E).
- Mr Rubenstein's understanding of the EVRF in September 2005 must be distinguished from what he and his wife understood about it after the fund was suspended in September 2008. There is no evidence that Mrs Rubenstein knew any of the details of the PAB in September 2005, beyond what her husband told her. She was in New York in late August. It is not clear whether she was back by 22 September, but her evidence was that she thought the investment was a simple deposit. It was only when the EVRF was suspended, that Mrs Rubenstein brought her investment banking experience to bear in trying to find out what had gone wrong. She obtained a copy of the latest AIG newsletter. She looked at the investment profile of the EVRF between 2005 and 2008. She asked some fairly penetrating questions of AIG Life. So did Mr Rubenstein, no doubt encouraged by discussing the matter with his wife. He asked for a copy of the policy conditions (there is some doubt whether he received a copy in 2005, but if he did, it was not sent until the bond was issued and was later mislaid). There is no doubt that Mr and Mrs Rubenstein scrutinised very closely all of the documentation they could get hold of. One must therefore be careful, when reading the emails which passed between them and AIG Life in September and October 2008, not to assume that they represent the extent of their understanding of the EVRF three years earlier.
- Mr Rubenstein was cross-examined about his understanding of the PAB and the EVRF in August and September 2005. He said that he read the product brochure and key features document and understood some of it. He realised that an investment in the PAB was not a straight deposit but involved the acquisition of units. He did not understand how unit pricing worked. He understood that there was a risk posed by AIG Life having to encash a large number of securities within the bond and he understood that in those circumstances AIG Life might incur costs and had power to defer repayment by up to 3 months. He believed that such a scenario would be an extreme case. He did not understand the reference to "costs" to mean that the value of the units might fall to the point where they were worth less than his original investment. He was prepared to live with the risk of deferral of payment, but did not realise that deferral might mean that he would not get all of his capital back.
- Mr Cogley disputed that Mr Rubenstein did not appreciate the risk to his capital because he had asked him in cross-examination what he would do if the rate of return from the bond fell to the point where it was insufficient to cover the monthly withdrawals which were needed in order to pay rent. It was put to him that AIG Life would have to resort to the capital of the investment in order to maintain the level of the monthly payments. Mr Rubenstein accepted that that was the case and that he had not been looking for an investment which ring-fenced the capital in those circumstances. Those answers establish that Mr Rubenstein did not consider the capital as inviolate, in the sense of being risk free. But I do not consider that they are inconsistent with the rest of his evidence that he did not understand that his capital might be at risk because a large number of investors wanted to withdraw their funds. These answers, which were to questions put on the premise that the interest earned within the bond was insufficient to service the withdrawals, have also to be reconciled with the fact that, after reading the product literature, Mr Rubenstein sent the message on 24 August about not being able to afford any risk to the capital sum, after he had read the product literature.
- I accept Mr Rubenstein's evidence that, although he was not insisting that his capital should be ring-fenced, he was looking for an investment which posed the minimum possible risk to the capital. I find that he relied on Mr Marsden's response as providing reassurance that the EVRF met that requirement. A contrary conclusion would only really be possible if the evidence showed that Mr Rubenstein chose the PAB from a range of products offered, or chose the EVRF from other funds which had been explained to him. There was no such evidence. I also find that there was a breach by Mr Marsden of COB 5.4.3R because he did not adequately explain to Mr Rubenstein that, in theory at least, he could get back less than the capital he put in, even if Mr Marsden was right to think that the prospect of that happening was negligible.
- This question raises issues as to the scope of duty, causation, foreseeability and remoteness. I deal first with the claims in contract and tort. In the SAAMCO case (Banque Bruxelles Lambert S.A. v Eagle Star Insurance Co. Ltd [1997] AC 191 at 214C-F), Lord Hoffmann highlighted the distinction between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. As an example of the scope of a duty of the first kind, he gave the doctor called upon to advise a mountaineer about the fitness of his knee. If the doctor negligently pronounces that the knee is fit and the mountaineer goes on a mountaineering expedition which he would not have undertaken if he had been told the truth, the doctor will be liable for any injury suffered by virtue of the damaged knee but will not be liable for any other injury sustained by the mountaineer even if resulting from an entirely foreseeable consequence of mountaineering.
- Mr Cogley submitted that the bank had done no more than assume a duty to take care that the information it provided to Mr Rubenstein was correct. It was not liable for loss which arose as a result of the extraordinary market conditions which arose in September 2008 and the suspension of the EVRF. He cited, by way of a more closely analogous example than the doctor advising the mountaineer, the case of Andrews v Barnett Waddingham LLP [2006] EWCA Civ 93. In that case, Mr Andrews was given negligent advice about the degree of protection he could expect under the Policyholders Protection Act 1975 if he transferred his pension fund from a company scheme to a pension provider and used it to buy an annuity. As a consequence of the advice he transferred his fund to Equitable Life and purchased an annuity from that company some 5 years before there was any perception that it might be in financial difficulty. Then in July 2000 the House of Lords reached its decision in Equitable Life Assurance Society v Hyam [2002] 1 AC 408. As a result of that decision Equitable Life closed its doors to new business and Mr Andrews found that the value of his annuity diminished. Cox J. awarded Mr Andrews damages for the diminution in value; but the Court of Appeal Brooke and Richards LJJ and Sir Paul Kennedy) reversed that decision. It did so on the ground that the loss was caused by the type of annuity that Mr Andrews had purchased, and the financial misfortunes of Equitable Life. It was not caused by the incorrect advice about the Policyholders Protection Act. The Court of Appeal observed that the position might have been different if Equitable Life had gone into liquidation.
- I do not think that Andrews v Barnett Waddingham LLP affords the bank the assistance which Mr Cogley seeks to derive from it. It was not alleged in that case that the defendants had owed a duty to advise Mr Andrews as to the suitability of the annuity. The allegation of negligence was confined to the advice about the 1975 Act. I have held that the duty which HSBC owed in this case was wider than a duty simply to ensure that the information which Mr Marsden provided about the EVRF was accurate. The bank would have owed a duty of that kind if the contract had been one for execution only. Here, however, Mr Marsden assumed an advisory role and made a personal recommendation to Mr Rubenstein. He was under a duty to take care to ensure that the investment he had recommended was suitable for Mr Marsden, and the most suitable from the range of products available. Whilst Mr Marsden may not have assumed responsibility for advising Mr Rubenstein generally as to what course of action to take in investing his money, the scope of his duty did extend to advising on a suitable investment within the parameters of the brief Mr Rubenstein had given him. The bank was therefore obliged to consider all the potential consequences of the suggested investment being made and is liable for all the foreseeable loss caused by making that investment.
- Mr Cogley's second submission was that the negligent advice did not cause the loss. He submitted that the loss was caused by market hysteria which followed the collapse of Lehman Brothers. Mr Egerton put it rather more broadly. He said that no loss was caused by investing in the EVRF. All of the loss had resulted from the banking crisis created by the widespread defaults in the U.S. sub-prime mortgage market. He endeavoured to illustrate the point by producing an alternative loss scenario which examined the position of Mr Rubenstein in the middle of the week before the Lehman Brothers' bankruptcy. At that point, taking account of the interest earned and the value of the units in the EVRF then being quoted, Mr Rubenstein was £62,000 better off than if his money had been deposited in an HSBC Premier account. That changed at the opening of business on Monday, 15 September only because there was a wholly unprecedented run on the fund.
- Causation and foreseeability are closely linked concepts. The argument that, by reason of the bank's breach of duty, Mr Rubenstein invested in an unsuitable product which he did not understand, is not enough to render the bank liable for the loss which flowed from the run on the fund unless the loss was caused by what it was about the advice which was negligent. As the decision in Andrews v Barnett Waddington shows, the suggestion that Mr Rubenstein would not have invested in the EVRF if the advice had not been given does not of itself establish the necessary link. Without the negligent advice, Mr Andrews would not have bought his annuity from Equitable Life, and the mountaineer would not have set out on the mountaineering expedition. However the duty here was not simply one of providing information. It was a duty to advise on a specific investment. Mr Rubenstein did not say in terms that he would not have invested in the EVRF if Mr Marsden had not recommended it: but that to my mind is the inescapable conclusion from his evidence as a whole. He relied on Mr Marsden's advice and was willing to invest his money in whatever Mr Marsden recommended. So I accept that, but for the negligent advice, Mr Rubenstein would not have invested in the EVRF.
- In Mr Virgo's submission this was enough to establish the chain of causation. The structure of the EVRF rendered it vulnerable to a loss of investor confidence and to a high demand for the withdrawal of funds, because the underlying assets provided insufficient liquidity. The same problem would not have occurred, or was far less likely to occur, with a true cash deposit. The higher risk inherent in the constitution of the EVRF compared with a bank deposit (or even the SVRF) was the root cause of Mr Rubenstein's loss rather than market events themselves. I am not persuaded that this is correct. The experts were all agreed that the constitution of the EVRF was very different from a cash deposit but, save for Dr Thompson, they were also all agreed that in September 2005 the risk inherent in the EVRF was only marginally or slightly higher than that of a conventional deposit. Insofar as Dr Thompson suggested that the risk was significantly higher, I think her evidence was coloured by hindsight and I do not accept it. The damage which eventuated, namely, the closure of the fund and a substantial loss of investors' original capital, was triggered by subsequent events. If those were not events of a kind which were foreseeable when the investment was made, I do not think that it can be said that the structure of the product truly caused the loss.
- Mr Cogley cited the well-known definition of foreseeability in the speech of Lord Reid in C. Czarnikow Ltd v Koufos, The Heron II [1969] 1 AC 350 at 382-383. Loss which is reasonably foreseeable and not too remote to be recoverable is loss of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from a breach – the words "not unlikely" denoting a degree of probability considerably less than an even chance, but nevertheless not very unusual and easily foreseeable. Lord Reid justified the restrictive character of his definition by pointing out (at 385) that the court in Hadley v Baxendale (1854) 9 Exch 341:
- Lord Reid was there dealing with the recovery of damages for breach of contract. He observed that the test of reasonable foreseeability of loss in tort might impose a much wider liability by requiring a defendant to pay for something which, although reasonably foreseeable, was very unusual and not likely to occur. But this would only be so where the factual circumstances led to the conclusion that the defendant had assumed responsibility to the claimant for loss of the kind in question.
- I did not understand either side to contend that in the present case the difference between the measure of damages in contract and the measure of damages in tort was of critical or any importance. A good deal of the argument centred on the relevance to foreseeability and to the appreciation of risk of the contractual right of suspension in the policy conditions of the PAB. For shorthand, this was referred to by both parties as "the moratorium". Mr Virgo contended that the moratorium demonstrated that a run on the fund was foreseeable and the risk was one which must have been appreciated by the bank. Mr Cogley responded by saying that if that was so, Mr Rubenstein must be taken to have known of the risk as well, because he knew about the moratorium before he decided to invest in the EVRF. I have already rejected that part of Mr Cogley's argument (see the previous heading of this judgment). I did so because I accepted that Mr Rubenstein did not understand the moratorium to pose any risk to his capital. He thought that the moratorium was designed to give AIG Life a breathing space at times of high demand for withdrawals, so that within the period of suspension arrangements could be made for an orderly pay out to investors, but with no risk to their capital. It is fairly obvious that that was indeed the intention. What in fact happened when the moratorium was imposed between September and December 2008 was that demand for withdrawals was so great that even a fire sale of assets over a 3 month period was going to be insufficient to repay investors without loss to their capital even greater than was achieved by repaying half of each investment and closing the fund. The secondary market for the assets in the EVRF had collapsed. Mr Rubenstein did not appreciate that this could happen: but neither did HSBC.
- In this case, where there is no allegation that the bank was under a continuing duty to give advice to Mr Rubenstein after the investment was made, the test of what was reasonably foreseeable must be applied as at September 2005: and not at any time thereafter. Since the autumn of 2008, we have become accustomed to economic bombshells of a kind not seen since the Great Depression. We are now reconciled to the fact that a sovereign state within the eurozone has defaulted. We have now witnessed the downgrading of the AAA credit rating of the United States. The suggestion that either of these events was going to occur would have been regarded as fanciful in September 2005.
- The suspension of the EVRF was triggered by a volume of requests for withdrawal of funds between 15 and 18 September 2008 which was greater than that which AIG Life had received in any previous 3 month period. The run on the fund was triggered by a well-founded rumour in the U.S. financial markets that AIG was going to go bankrupt. It is now known that it might well have done if it had not received support from the U.S. Federal Reserve. Investors in the PAB, ignorant of the fact that the assets of AIG Life were held separately from those of its American parent, rushed to cash in their investment. The idea that one of the world's largest insurance companies might go bankrupt was unthinkable in September 2005, just as it was unthinkable then that one of the UK's major clearing banks might find itself unable to repay depositors. But that is what would have happened if the U.K. Treasury and the Bank of England had not stepped in to assist the Royal Bank of Scotland in the autumn of 2008. As Mr Cogley put it, the concept of a run on AIG was "so remote that no financial adviser would have been required to point it out as posing a risk to capital". In my judgment he was right. What happened to the EVRF on 15 September 2008 and the days following was wholly outside the contemplation of the bank or any competent financial adviser in September 2005.
- I find that the loss was not caused by any negligence on the part of Mr Marsden in making the recommendation. I also find that the loss was not reasonably foreseeable by HSBC and is too remote in law to be recoverable as damages for breach of contract or in tort.
- That still leaves the breaches of COB. The breaches of the procedural rules in COB 5.2 and 5.3 can give rise to no more than nominal damages because I accept Mr Marsden's evidence that, even if he had followed the procedural requirements to the letter, he would still have recommended the EVRF. The breaches of COB 2.1.3R ("clear fair and not misleading") and COB 5.3.5(2)R ("the most suitable") are in a different category. The misdescribing of the risk attaching to an investment in the EVRF as being the same as cash deposited in one of HSBC's accounts was undoubtedly instrumental in persuading Mr Rubenstein to invest in the EVRF. Whilst it has been held that COB 2.1.3R does not of itself require any particular advice to be given (see Andrew Smith J in Maple Leaf Macro Volatility Master Fund v Rouvroy [2009] EWHC 257 (Comm) at para. 369, and Eady J in Wilson v MF Global UK Limited at para. 122), Mr Marsden was doing more than just giving information. He was responding to a request for advice and was giving Mr Rubenstein advice in the form of his qualitative assessment of the risk. Similarly, the breach of COB 5.3.5(2)R by recommending the EVRF, when it was not the most suitable investment, influenced Mr Rubenstein to decide to invest in that product rather than in one with less risk. Both breaches are therefore ones for which damage flowing from the decision to invest in the EVRF may be recovered. However, neither side submitted that in this case the measure of the damages under section 150 of FMSA was any different from that which could be recovered for breach of contract or in tort. No one has suggested that the same approach to causation, foreseeability and remoteness does not apply. Accordingly, for the reasons I have already given, I am unable to find that the decision to invest in the EVRF caused the loss which Mr Rubenstein claims or that the loss is one which was a reasonably foreseeable consequence of his having made 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.
- In case I should be wrong about liability, I will deal briefly with the amount of the loss. There were four calculations put forward by the parties. Save for one of them, the arithmetic was agreed. The difference of opinion was as to the appropriate comparator to represent what Mr Rubenstein would have received if his money had been invested in a more capitally secure environment.
- Mr Rubenstein's initial letter of claim was that he ought to have been advised to invest in the SVRF. His present solicitors, Clarke Willmott, have since produced a calculation of what the outcome would have been if he had invested in the SVRF rather than the EVRF. It shows a loss of £122,853.44 net of basic and higher rate income tax.
- However Mr Rubenstein's pleaded case was not that he ought to have been advised to invest in the SVRF. Clarke Willmott's letter before action dated 11 November 2008 asserted that: "Properly advised, Mr Rubenstein would have originally invested his money in HSBC deposit accounts at one month's notice". The case then pleaded in the particulars of claim (at paragraph 12(h)) was that the bank had failed to advise that "the most suitable investment … would be to place the money in one or more deposit accounts". The net loss of £186,561.72 in the schedule to the particulars of claim was based on a comparison with the Bank of England's Quarterly Average Interest Rate. That is a rate derived from the base rates of 4 banks identified on the Bank of England's website. But that was not the loss for which Mr Rubenstein was contending at the conclusion of the trial.
- At the conclusion of the trial, Mr Rubenstein claimed, instead, either (1) the loss figure in Dr Thompson's latest report, or (2) the sum of £122,853.44 based on the comparison with the SVRF, or such sum as flowed from any other comparator the court thought fit. The figure in Dr Thompson's latest report was £132,346.15, based on what would have happened if 10% of the capital had been placed in the HSBC Premier Account and the remaining 90% had been placed in an account carrying interest at the rate applicable to deposits with 3 months' notice. Dr Thompson chose for this rate, the rate which was being offered by an account called the Investec High 5 account.
- Dr Thompson included in her evidence an alternative loss calculation on the assumption that the investment was put in the name of Mrs Rubenstein. The justification for this alternative was that it would have been fiscally efficient for the investment to have been in Mrs Rubenstein's name since she was not a UK taxpayer or higher rate taxpayer. There are two problems with this alternative case. The first is that, whilst one of the breaches of duty alleged in the particulars of claim was that Mr Marsden had failed to ascertain Mrs Rubenstein's tax status and had failed to advise that there were tax advantages in placing the investment in her name, no claim for damages on this basis was ever advanced. The second problem is that the tax consequences of the investment being placed in Mrs Rubenstein's name were not explored at the trial. I am far from being persuaded that she would have paid no tax at all on any interest earned. If she would have been liable to tax, it is also not clear to me whether the liability would have been to UK income tax or to US Federal income tax. I say no more about this alternative.
- The comparator for Mr Egerton's loss calculation was the HSBC Premier account. The revised calculation of loss in his second report gave a figure of £92,492.42. Mr Egerton justified the use of the HSBC Premier account on the ground that this was the type of account which the Rubensteins had chosen as the destination of the proceeds of sale of their house in September 2005 and it was also the type of account into which the funds withdrawn from the PAB in the autumn of 2008 were initially placed.
- The measure of damages is the sum which will place Mr Rubenstein in the position he would have been in if the contract with the bank had not been broken. It follows that Mr Rubenstein's loss should be calculated as if HSBC had succeeded in recommending the most suitable investment, using that investment as a comparator.
- Dr Thompson put forward the Investec High 5 account as the appropriate comparator because she was of the opinion that, had Mr Rubenstein been properly advised, "... he would have invested in a number of deposit accounts with the highest rates which still met his requirements for liquidity and security". The problem is that the Investec High 5 account was only available in the form of a 2 year variable rate bond, allowing one penalty-free withdrawal on the first anniversary. Mr Rubenstein was unlikely to have wanted to tie up 90% of his capital in such an instrument. So it is only of use as a comparator for its illustrative interest rate. The rate was based on the mid-point or average of the 5 highest savings accounts as selected by Moneyfacts. Each of those savings accounts had a maximum permitted investment which, cumulatively, was less than 90% of Mr Rubenstein's capital. The question immediately arises is whether Mr Rubenstein would have achieved the same average rate by spreading his investment across more than 5 savings accounts, and whether he would have been prepared to do so. At the outset he had been looking for an account or accounts which paid a better rate of interest for large sum. Spreading his deposits across a large number of accounts would have run counter to this philosophy.
- In his closing submissions, Mr Virgo invited me to call for further calculations or to direct an inquiry if I was not persuaded that either the SVRF, the HSBC Premier account or an investment or investments producing a rate equivalent to the Investec High 5 account was the right comparator. Mr Cogley objected to this approach on the ground that nowhere in the course of his evidence did Mr Rubenstein say what his choice of investment would have been if the EVRF had not been recommended to him. Mr Cogley submitted that this was fatal to Mr Rubenstein being able to prove any loss and that seeking to divine the appropriate comparator in those circumstances was pure speculation. I think this objection overstates the difficulty. It was not for Mr Rubenstein to say what the most suitable investment would have been. The tenor of his evidence was that he would have invested in whatever Mr Marsden advised him to invest in. The experts have now given their views as to the alternatives. That evidence is sufficient, in my judgment, for Mr Rubenstein to mount a claim for damages, and to invite the court to conclude what the appropriate comparator should be. However, there is one caveat. Since the particulars of claim contained the positive allegation that the most suitable investment was one or more deposit accounts, and it has never been part of Mr Rubenstein's pleaded case that the most suitable investment was the SVRF, I do not think it would have open to me to award damages on the basis of the SVRF calculation even if I had held that the SVRF was the most suitable investment rather than a cash deposit.
- I am left with Mr Egerton's figure derived for the HSBC Premier account or Dr Thompson's figure derived from the Investec High 5 account. I reject the former because it places all of the money on deposit at instant access rates, when no more than 10% needed to be the subject of instant access and a better rate could be achieved for the balance of 90% by conceding 3 months' notice. I reject the latter because the Investec High 5 rate was not achievable for the whole of the balance of the capital without taking out an Investec High 5 bond. Although Mr Rubenstein would have been best advised to spread the 90% across more than one deposit account with 3 month notice terms, I am not in a position to identify the optimum number or even a maximum number, let alone which ones. I do not think it would be right to invite further argument from the parties on that issue. Mr Marsden would not have been criticised if he had recommended the 3 month notice deposit account of any major UK bank or building society. So I hold that the appropriate comparator for the balance of 90% is the rate for the time being of the best (in terms of rate) of the 3 month notice deposit accounts of the UK clearing banks on 22 September 2005. I will hear from counsel whether the parties wish to proceed with the re-calculation notwithstanding my conclusion on liability, and if so, how it should be done.
- I must also deal shortly with the bank's case on contributory negligence. Although the failure to mitigate argument was abandoned, the bank maintained its argument that Mr Rubenstein was contributorily negligent in failing to ask Mr Marsden any questions about the investment beyond the single inquiry about risk on 24 August. Mr Cogley referred to the fact that Morgan J found in Spreadex Ltd v Sekhon [2008] EWHC 1136 (Ch) that Dr Sekhon was 85% to blame and that in Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm) Flaux J would have been prepared to hold Mrs Wachner 75% responsible for her loss if he had found in her favour on liability. But both those cases were ones where the client had ignored advice from the professionals. I think it is going too far to apportion blame to a client who asks the critical question about risk but does not probe deeper into the workings of the product he is recommended, once he is told that the risk of investing in it is the same as a cash deposit. Had I found the bank liable for Mr Rubenstein's loss, I would not have reduced the damages by reason of contributory negligence.
- A footnote to the argument on quantum is that, on 7 April 2011, ALICO or AIG Life paid Mr Rubenstein a sum of £7,195.23. The sum comprised a principal amount, which was equivalent to 1.51% of the second half of the investment withdrawn from the PAB in December 2008, and interest over the intervening period at the rate of 0.75% per annum. The explanation for the payment is that ALICO recently made a monetary recovery in respect of 3 assets that had been held in the EVRF and decided to distribute this recovery, pro rata, to the policyholders who were invested in the fund when it closed. Policy holders had no contractual entitlement to the money. The distribution was made on an ex gratia basis within the spirit of ALICO's "Treating Customers Fairly" policy. The question is whether HSBC is entitled to credit for this sum against any award of damages to Mr Rubenstein.
- Since news of the payment only surfaced at the very end of the trial, I did not hear full argument on the point. The payment should only be treated as a deduction from the damages, if it can be regarded as loss which has been avoided. The payment falls outside Lord Haldane's rule in the British Westinghouse case (British Westinghouse Electric and Manufacturing Co. Ltd v Underground Electric Railway Co. of London Ltd No. 2 [1912] AC 673) because it was not made as a consequence of anything done by Mr Rubenstein. It was a payment made by a third party. In general benefits conferred on claimants by third parties, even if they reduce the loss, are left out of account as being "res inter alios acta" i.e. of no concern to the relationship between the innocent party and the party in breach (see McGregor on Damages, 18th edition, paragraphs 7-137 to 7-168). Benefits conferred by third parties are generally said to be "collateral" where they have arisen independently of the transaction or of the incident giving rise to the claim and have not stemmed directly from an act done in consequence of the wrong or an act done in an attempt to mitigate its effect or an act forming part of a string of events which represents a continuation of the original transaction or incident. However I see no reason in principle why a benefit conferred by a third party which is not collateral, in the sense that it can be seen to have been caused by or to have flowed from the original breach of duty should not be brought into account. In Needler Financial Services v Tauber [2002] Lloyd's Rep PN 32, Sir Andrew Morritt V-C declined to allow a financial services company which had been found liable for pension mis-selling to have credit for the demutualisation payment which the client received from the pension provider (Norwich Union) to which his pension had been transferred as a result of negligent advice. The decision is criticised in McGregor (at paragraph 7-146) but I can understand its rationale. The demutualisation was wholly fortuitous. The same cannot be said of ALICO's payment. It arose directly in consequence of the investment in the bond and although it was not a payment to which Mr Rubenstein was legally entitled, it was paid to him out of moral obligation. Despite the gap in time since December 2008, I regard the payment as a continuation of the transaction whereby the defendant caused Mr Rubenstein to invest in the PAB. In my judgment, therefore, credit should be given for the sum of £7,195.23 in calculating the damages if, contrary to my conclusion, the bank is liable to Mr Rubenstein.
- For the reasons I have given, Mr Rubenstein is entitled to no more than nominal damages. The claim for substantial damages is dismissed.
JUDGE HAVELOCK-ALLAN
The AIG Premier Access Bond
"Look at the rates offered by the Premier access bond from AIG Life. Do they beat the net returns you currently receive from money on deposit? They should do because we combine:
You don't even have to lock your money away to benefit from our attractive rates. Access to your money is quick and easy. The Premier Access Bond is a single premium life assurance bond offering an alternative to traditional bank and building society deposits. The Bond has a range of unit-linked funds which invest directly in money market instruments. These funds offer both variable rates which change with market conditions, and guaranteed rates which remove any short-term uncertainty. The Premier Access Bond does not normally have any entry or exit charges. Furthermore, because the rates of return credited to the funds are net of administration charges, tracking your investment is straightforward."
"Inside the Premier Access Bond your investment buys units in a range of funds, all of which invest in money market instruments to give you a competitive alternative to bank or building society deposits. The range of funds allows you to predict the growth in your bond either on a daily basis or over longer periods throughout the following 12 months.
There are currently 14 funds available; two variable rate funds and 12 guaranteed funds.
The Variable Rate Funds
The Variable Rate Funds have unit prices which normally increase on a daily basis at rates set in advance by AIG Life, reflecting the growth in the underlying assets of the fund and taking into account the size of your Bond. These rates change from time to time, and will generally move in line with changes in interest rates. As the growth rates are published in advance you will know how your funds will increase each day. However, as future rates are unknown, you will not be able to accurately predict how much your variable-rate funds will be worth in the future.
The Guaranteed Funds
The Guaranteed Funds each have a unit price which is guaranteed on a certain day in the future (the fund's Guarantee Date) and on the same day each year. There are 12 funds with one fund reaching its Guarantee Date each calendar month. As the unit price is guaranteed to rise from the unit purchase price to the Guaranteed Price, each fund offers a guaranteed rate of return if the units are held on to its Guarantee Date. AIG Life will publish these guaranteed rates each day so that you know what return you will achieve up to the Guarantee Date.
Other than on the Guarantee Date, the unit prices of the Guaranteed Funds are not guaranteed and will reflect the value of the assets held within the fund, and may rise or fall on a daily-two-day basis.
Therefore the Variable Rate Funds allow you to predict the growth in your funds on a daily basis but not over longer periods whereas the Guaranteed Funds allow you to predict the growth over a longer period, but with less certainty on a day-to-day basis."
"The Standard Variable Rate Fund ("the Standard Fund") is a unit-linked cash fund investing in the short term, high-quality financial money market instruments. It aims to generate growth rates that reflect general trends in short-term interest rates whilst providing a very high degree of safety by holding a diversified portfolio of very high quality assets.
To make sure your money is as secure as possible, AIG Life invests in AAA and AA rated financial institutions which also have a P1 rated SUPERIOR ability for repayment of senior short-term debt obligations (P1 is the highest credit rating given to the financial institutions in the short term deposit market).
A typical fund portfolio would be invested in banks such as Barclays, Citibank, Halifax Bank of Scotland, Lloyds TSB and UBS.
The fund's unit price will be linked to the value of its underlying assets and the rate of return on the fund will be reflected in successive unit prices. The rate of return at any time, which is published by AIG Life, will depend upon market conditions and is not guaranteed.
As all the assets purchased are very high quality and short term in nature, the fund shall be considered to be very cautious, with a very high degree of capital protection. ….
The Enhanced Variable Rate Fund ("the Enhanced Fund") is similar to the Standard Fund but is aimed at achieving a slightly higher return by investing in a wider range of assets within the money markets. The fund offers a high degree of safety by holding the highest quality assets commensurate with its enhanced yield.
The fund's main objective is to produce a competitive return by investing in a wide range of high quality companies while maintaining a high degree of safety. Unsurprisingly, the fund will be dominated by many of the same names as the Standard Fund, with most of the fund invested in financial institutions.
The Enhanced Fund will mainly be invested in AAA and AA rated companies with the remainder in A rated companies. The fund may invest in a range of high quality debt instruments issued by these companies.
The fund should achieve a higher yield than the Standard Variable Rate Fund because it has access to:
(i) a wider range of companies. By allowing the list of companies to widen a little from those acceptable to the Standard Fund, the Enhanced Fund is able to invest in strong companies offering slightly higher yields. The companies are subject to strict quality checks and are still considered to be very safe investments.
(ii) a wider range of instruments issued by the companies it identifies. These assets will have a slightly higher yield as they have a smaller target market and may be more difficult to sell before they mature. However as the fund usually purchases assets to hold until maturity, it is in a position to take advantage of any yield enhancements.
(iii) assets with slightly longer periods until maturity. This enables the fund manager to take advantage of a positive sloping yield curve which rewards longer investments with higher yields.
Although the fund carries slightly more risks than the Standard Fund it should still be considered to be a cautious fund. Although the criteria are clearly wider than those of the Standard Fund, the fund places high importance on the preservation of capital."
"If large numbers of Bonds are in encashed at the same time, the fund(s) may incur costs in selling assets to meet these encashment and these costs would normally be reflected in the unit price(s). Alternatively AIG Life may defer encashments for up to 3 months if it considers that this would be more beneficial for Bondholders generally. This would only happen in very exceptional circumstances.
For the same reasons AIG Life is not able to guarantee to meet the usual withdrawal timetable for very large withdrawals, and investors are recommended to give one week's notice for any withdrawals exceeding £10 million in order to avoid any potential delays."
"Your Commitment
You invest a single lump sum investment into the Premier Access Bond for as long as you wish it to remain invested into which you have access at any time, normally free of charges. You should ensure that you have read and understood this document and the Premier Access Bond brochure before making this commitment."
Next, under the next heading of "Risk Factors", there appeared these bullet points:
"Your investment and the return from it are only as secure as the selected range of assets purchased by the funds you choose. Your investment is only at risk if any of these financial instruments failed to meet their obligations.
...
If large numbers of Bonds are encashed at the same time, the funds may incur costs in selling assets prior to their intended maturity date to meet these encashments, and these costs may cause a fall in unit price and therefore the return on your Bond. Alternatively, AIG Life may defer encashments for up to 3 months if it considers that this will be more beneficial to Bondholders generally. This would only happen in very exceptional circumstances.
…"
On the following page of the key features document there was an illustration of the possible return from an investment in the PAB of £100,000 over a period of 10 years, assuming various rates of growth. At the foot of the page was the following paragraph:
"WARNING – there is normally no charge made by the Company for early encashment, but the value of funds would be affected by any costs arising from the early encashment of assets. The amounts assume that all returns credited to your Bond are not withdrawn but accumulated throughout. The amounts are rounded down to 3 significant figures."
"7. Unit Pricing
7.1 The Unit Price of the Funds will be calculated on each Pricing Date. Pricing Dates will normally be each business day.
7.2 The method of calculating the Unit Prices will be determined by the Actuary and described in the Fund Rules.
7.3 For the purpose of determining the benefits secured by the Policies, each Fund is notionally split into a number of Units of equal value, the "Unit Price".
7.4 At any time there is a single Unit Price at which Units are allocated and cancelled within any particular Fund.
7.5 The values of the Unit Prices of the Funds are not guaranteed in any way. The Unit Prices will vary from time to time and can go down as well as up.
…
8. Deductions from the Funds
8.1 The Company may from time to time deduct from the assets of each particular Fund amounts it deems appropriate for:
(a) liabilities and potential liabilities of that Fund including, but not limited to, investment costs, management, administration and sales expenses, taxes, levies and duties and any costs associated with the early encashment of deposits
(b) relevant taxes incurred by the Company
(c) a contribution towards the expenses and profits of the Company.
8.2 The Company reserves the right to determine the amounts deducted as described in this Condition 8 and to vary such amounts at any time by such reasonable amount as it deems appropriate, without notice provided that the aggregate of the deductions is less than the maximum aggregate charge for the relevant Fund published by the Company from time to time The Company may change the maximum aggregate charge for any particular Fund at its reasonable discretion subject to giving three months notice to any Policy holder whose Policy has units of that Fund allocated to it.
8.3 If large numbers of switches and/or withdrawals are made from the same Fund at the same time, the Fund may incur costs in selling assets to meet these encashments. Alternatively the Company may defer switches and withdrawals for up to three months if it considers that this would be more beneficial to Policy holders generally. It is likely that this will only happen in exceptional circumstances.
8.4 This Condition 8 is subject to any rules applicable to a particular Fund in the Fund Rules."
"Unit pricing and fund charges
3.4 The Unit Price changes on a daily basis at a rate derived from the return achieved on the underlying assets less a deduction for charges which may be varied by the Company on a daily basis.
3.5 The maximum aggregate charge for the Variable Rate Funds is the aggregate of the amount the Company deems appropriate to cover taxes incurred by the company as a result of holding the Funds, commission payable to advisers and 0.5% a year of the average daily value of the Fund.
3.6 The minimum values of the unit Prices are not guaranteed in any way. The Unit Prices will vary from time to time and can go down as well as up."
The Asset Rules contained unit pricing provisions to the same effect. So the units in each fund were not valued in accordance with mark-to-market or fair value accounting, but by an internal process of valuation by the actuary of AIG Life. There was in fact no promise to pay any particular sum in response to a request for withdrawal.
How Mr Rubenstein came to invest in the Bond
"The gross equivalent rates for £1m plus are:
5.78% on a fee basis (minimum fee is £1500)
5.12% on a commission basis."
"Adrian
Being independent we have two offerings as to how you wish to pay for the advice.
The fee is charged at £190 per hour plus VAT with a minimum of £1,500. Once this is agreed any commission the bank would have earned will be rebated in the form of a higher gross equivalent return.
Any ongoing service would then be charged at £190 per hour with no minimum.
I have attached two of our disclosure documents about our service and the cost of our services.
Thanks
Matthew Marsden"
"We will advise and make a recommendation for you after we have assessed your needs.
You will not receive advice or a recommendation from us. We may ask some questions to narrow down the selection of products that we will provide details on. You will then need to make your own choice about how to proceed.
We will provide basic advice on a limited range of stakeholder products and in order to do this we will ask some questions about your income, savings and other circumstances but we will not:
None of the boxes against these statements was marked.
"Before we provide you with advice, we will give you our keyfacts guide "about the cost of our services".
We will tell you how we get paid, and the amount, before we carry out any business plan for you."
"We offer an initial discussion (without charge) when we will describe our services more fully and explain the payment options. If you decide to go ahead, we will:
Section 3 describes the payment options we offer advice on the types of products illustrated in the table is a belief. Any advice we provide on other products and services may be available on a fee only basis (e.g. writing a Will) or commission only basis (e.g. certain cash-based products). We will always let you know the payment options available in advance."
Section 3 ("What are your payments options?") was in these terms:
"All firms charge for advice in the same way. We will discuss your payment options with you and answer any questions you have. We will not charge you anything until you agreed how we are to be paid. We have ticked the payment options we offer. [The boxes opposite both of the following two statements were ticked.]
Paying by fee. Whether you buy a product or not, you will pay us a fee for our advice and services if we also receive commission from the product provider when you buy a product, we will pass on the full value of that commission to you in one or more ways. For example, we could reduce our fee; or reduce your product charges; or increase your investment amount; or refund the commission to you.
Paying by commission (or product charges). If you buy a financial product, we will normally receive commission on the sale from the product provider. Although you pay nothing up front, that does not mean our service is free. You still pay us indirectly through product charges. Product charges pay for the product provider's own costs and any commission. These charges reduce the amount left for investment. If you buy direct, the product charges could be the same as when buying through an advisor, or they could be higher or lower. We will tell you how much the commission will be before you complete an investment, but you may ask for this information earlier."
"Matthew
I've done a few sums to try to compare the impact of the two payment mechanisms. Underlying all this is the fact that we are very unlikely to need this account for more than a year; probably less.
Over the course of that year, the commission-based rate removes about £8500 gross interest. If I've done my sums properly, that equates to about 37 hours' work based on the charge-out rates you quoted. Are you really likely to need to spend that kind of time in setting up and managing the account?
Regards
Adrian"
The swift response from Mr Marsden was:
"It is very likely that the minimum fee will be charged and that will be all. As once the account is open it is effectively an instant access account so it is unlikely that you will need further advice."
"Matthew
We can't afford to accept any risk in the investment of the principal sum. Can you confirm what – if any – risk is associated with this product?
Regards,
Adrian"
Mr Marsden replied almost at once in the following terms:
"Adrian
We view this investment as the same as cash deposited in one of our accounts.
I understand this question as no doubt you have read a statement such as "fall as well as rise".
The reason for this is that as the bond is wrapped in insurance bond legislation (for tax reasons) it is looked after by the Financial Services Authority (FSA). As a result you want to be informed of all risk factors.
Putting it into context if you put all the money into an account with HSBC, the guarantee of your money is underpinned by the financial security of the institution. If HSBC were to fail however you would get money back in line with the depositor protection scheme which would only guarantee 33K of the 1.2 5m.
In the context of the FSA, the fall as well as rise pertains to the risk of default (as above with HSBC) of one of the accounts held within the fund. As the enhanced variable fund has a minimum security standard of A (HSBC is AA) the risk of default of one of the accounts is similar to the risk of default of Northern Rock.
I hope this clears up any queries you may have.
Matthew
PS The brochure explains the strength of AIG on page 4 or 5."
This was the first time Mr Marsden had expressly mentioned the EVRF.
"If investing in any of the Guaranteed Funds, what would you like to happen once their Guarantee Date is reached (please tick).
(a) Switch into the Standard Variable Rate Fund
(b) Remain invested in the Guaranteed Fund until further notice"
"I/We have read and understood the Premier Access Bond brochure and Key Features document, agree to the terms of this offer, declare that the details given herein are true and complete to the best of my/our knowledge and belief, and I/we ask AIG Life to accept my/our investment in the Premier Access Bond."
"Please provide the following services to me. I understand that the fee will be charged to the services at the rate of £190 plus VAT per hour and where the fee relates to advice on packaged products it is subject to a minimum charge of £1500 plus VAT unless specified in section 3 - Notes below."
The Form was then divided into six sections. Section 1 was headed "Adviser's Fees (tick as appropriate)". Three options followed:
"Advice on packaged products (e.g. investments, pensions and life products -- minimum fee £1,500 plus VAT. This will include any technical support required for these products).
Other services (e.g. other advice or financial planning arrangements).
Not applicable."
In the Form, as it was sent by Mr Marsden and received by Mr Rubenstein, a colleague of Mr Marsden's had inserted "Y" for "Yes" against the first of these options. It is common ground, however, that the bank did not process the charge of £1,500 plus VAT and it was never debited from Mr Rubenstein's account.
Mr Rubenstein's decision to withdraw from the Bond
"As a result of financial market developments over the past weekend, notably the filing for Chapter 11 protection of Lehman Brothers, Inc., the proposed takeover of Merrill Lynch by Bank of America and the press coverage surrounding AIG Inc., we have witnessed withdrawal requests far in excess of normal levels from the Enhanced Fund within the Premier Bond and the Premier Access Bond.
Given the volatility of the bond markets, we are unable to put a precise value on the fund assets. Therefore, we feel that it is in the best interests of policyholders to temporarily suspend withdrawals from the Enhanced Fund (including the Notice Funds) until the conditions within the financial markets have stabilised.
The Enhanced Fund currently has nearly £3bn of cash and near cash liquidity. AIG Life in the UK is fully capitalised and the assets are held separately for the sole use of the UK policyholders."
"The first step prior to closure will be to make available 50% of the fund value. This represents the amount of cash and liquid assets held by the fund. This will be done in the next few weeks via a switch into the Standard Fund to give policyholders access.
Those who wish to leave the Enhanced Fund on 15 December 2008 will be able to do so and will receive their share of the sale value of the fund's assets. In order to meet the requests we will need to sell some of the fund's assets before they mature. The prices we are likely to receive in current markets are poor. This will mean that policyholders leaving the fund on 15 December are very likely to receive less than the current value of their Enhanced Fund holding.
Those who prefer to continue with the Enhanced Fund's philosophy of holding assets to their maturity will be able to switch into a new fund replacing the Enhanced Fund. AIG Life (UK) will underpin this new fund so that each participating policyholder is guaranteed to receive, over time, at least the full value of their current Enhanced Fund holding."
"In the Enhanced Fund we currently have securities from three issuers that Moody's rates as Baa1, Baa2 and Baa3 respectively, representing 2% of the fund. However, we note these same three securities are rated A- by S&P and Fitch, A+ by S&P and Fitch, and A- by S&P – so called split ratings. Our credit analysts continue to closely monitor these three issuers as part of periodic credit review for the funds and we will opportunistically determine if market pricing vs. ongoing developments merit disposal of these securities."
Mr Rubenstein took this up with Mr McWatt. He asked why the EVRF held any securities with a rating lower than the A rating advertised in the product brochure. Mr McWatt told him that these three securities had carried the minimum rating of Aa3 by Moody's when they were purchased, but had subsequently been downgraded, and due to the poor market price they had not been sold.
The regulatory framework
"Advising a person is a specified [i.e. regulated] kind of activity if the advice is –
(a) given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and
(b) advice on the merits of his doing any of the following (whether as principal or agent) –
(i) buying, selling, subscribing for or underwriting a particular investment which is a security or a contractually based investment, or
(ii) exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment."
An execution-only transaction does not involve the giving of any advice. The Glossary Definition in the Financial Services Authority Handbook (see www.fsahandbook.info) of an execution-only transaction is:
"a transaction executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merits of the transaction."
"150. Actions for damages
(1) A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.
(2) If rules so provide, subsection (1) does not apply to contravention of a specified provision of those rules.
(3) In prescribed cases, a contravention of a rule which would be actionable at the suit of a private person is actionable at the suit of a person who is not a private person, subject to the defences and other incidents applying to actions for breach of statutory duty.
(4) In subsections (1) and (3) "rule" does not include—
(a) listing rules; or
(b) a rule requiring an authorised person to have or maintain financial resources.
(5) "Private person" has such meaning as may be prescribed."
"COB 2 – Rules which apply to all forms conducting designated investment business
COB 2.1 - Clear, fair and not misleading communication
COB 2.1.1 R
(1) This section applies to a firm when it communicates information to a customer in the course of, or in connection with, its designated investment business.
(2) This section does not apply to a firm when it communicates a financial promotion in circumstances in which COB 3 (Financial promotion) applies to the firm.
COB 2.1.2 G
The purpose of this section is to restate, in slightly amended form, and as a separate rule, the part of Principle 7 (Communications with clients) that relates to communication of information. This enables a customer, who is a private person, to bring an action for damages under section 150 of the Act to recover loss resulting from a firm communicating information, in the course of designated investment business, in a way that is not clear or fair, or is misleading.
COB 2.1.3 R
When a firm communicates information to a customer, the firm must take reasonable steps to communicate in a way which is clear, fair and not misleading.
COB 2.1.4 G
When considering the requirements of COB 2.1.3, a firm should have regard to the customer's knowledge of the designated investment business to which the information relates.
...
COB 4 – Accepting customers
…
COB 4.2 - Terms of business and client agreements with customers
COB 4.2.1 R (Application)
This section applies to a firm intending to conduct or conducting designated investment business with or for a specific customer.
…
COB 4.2.5 R (Requirement to provide terms of business to a customer)
Unless any of the exemptions in COB 4 Annex 1 applies, a customer must, in good time before designated investment business is conducted, be provided with a firm's terms of business, setting out the basis on which the designated investment business is to be conducted with or for the customer.
…
COB 4.2.6A G
(1) Terms of business will be provided in 'good time' for the purposes of COB 4.2.5 R if provided in sufficient time to enable the customer to consider properly the service or investment on offer before he is bound. …
COB 4.2.10 R (Content of terms of business)
A firm must ensure that its terms of business (including a client agreement with a customer) provided in accordance with this section, COB 4.2:
(1) set out in adequate detail the basis on which it will conduct designated investment business with the customer; …
…
COB 5 – Advising and selling
…
COB 5.2 – Know your customer
COB 5.2.1 R (Application)
This section applies to a firm that:
(1) gives a personal recommendation concerning a designated investment to a private customer; …
COB 5.2.2 G
A firm that arranges an execution-only transaction for a private customer is not generally required to obtain any personal or financial information about that customer, …. However, the Insurance Mediation Directive requires that a statement of the demands and needs of a client is provided to the client, whether advice is given or not. This is required whatever the status of the client. Accordingly the demands and needs provisions in COB 5.2.12 R to COB 5.2.17 G apply to all circumstances relating to life policies.
COB 5.2.3 G
When a firm provides limited advice on investments to a private customer, the firm should not treat any resulting transaction as an execution-only one.
COB 5.2.4 G (Purpose)
Principle 9 (Customers: relationships of trust) requires a firm to take reasonable care to ensure the suitability of its advice and discretionary decisions. To comply with this, a firm should obtain sufficient information about its private customer to enable it to meet its responsibility to give suitable advice. A firm acting as a discretionary investment manager for a private customer should also ensure that before acting in the exercise of discretion it has sufficient information about its private customer to enable it to act in a way which is suitable for that private customer.
COB 5.2.5 R (Requirement to know your customer)
Before a firm gives a personal recommendation concerning a designated investment to a private customer, or acts as an investment manager for a private customer, it must take reasonable steps to ensure that it is in possession of sufficient personal and financial information about that customer relevant to the services that the firm has agreed to provide.
...
COB 5.2.9 R (Record keeping: personal and financial circumstances)
(1) Unless (2) applies, a firm must make and retain a record of a private customer's personal and financial circumstances that it has obtained in satisfying COB 5.2.5 R. The firm must retain the record for a minimum period after the information is obtained, as follows:
(a) indefinitely for a record relating to a pension transfer, pension opt-out or free-standing additional voluntary contribution (FSAVC);
(b) six years for a record relating to a life policy, pension contract or stakeholder pension scheme; or
(c) three years in any other case.
(2) A firm need not retain the record where following a personal recommendation to a private customer in connection with a designated investment, the private customer does not proceed with the recommendation or any part of it.
...
COB 5.2.12 R (Statement of demands and needs)
(1) Unless either COB 5.2.13 or COB 5.2.14 applies, a firm must provide the client with a statement of his demands and needs if:
(a) it makes a personal recommendation of a life policy to a client; or
(b) it arranges (whether through issuing a direct offer financial promotion or otherwise) for the client to enter into a life policy.
(2) Unless (3) applies, the statement in (1) must be provided:
(a) as soon as practicable, and in any event before the conclusion of the contract for the life policy; and
(b) in a durable medium.
(3) A firm may provide the statement in (1) orally if:
(a) the client requests it; or
(b) immediate cover is necessary;
but in both cases the firm must provide the information in (1) immediately after the conclusion of the contract, in a durable medium.
...
COB 5.3 - Suitability
COB 5.3.1 R (Application)
This section applies to a firm when it:
(1) makes a personal recommendation concerning a designated investment to a private customer; …
…
COB 5.3.5 R (Requirement for suitability generally)
(1) A firm must take reasonable steps to ensure that, if in the course of designated investment business:
(a) it makes any personal recommendation to a private customer to:
(i) buy, sell, subscribe for or underwrite a designated investment (or to exercise any right conferred by such an investment to do so); or
(ii) elect to make income withdrawals; or
(iii) enter into a pension transfer or pension opt-out from an occupational pension scheme; or
(b) it effects a discretionary transaction for a private customer (except as in (5)); or
(c) it makes a personal recommendation to an intermediate customer or a market counterparty to take out a life policy;
the advice on investments or transaction is suitable for the client.
(2) If the recommendation or transaction in (1) relates to a packaged product:
(a) it must, subject to COB 5.3.8 G - COB 5.3.10 R, be the most suitable from the range of packaged products, on which advice on investments is given to the client as determined by COB 5.1.7 R; and
(b) if there is no packaged product in the firm's relevant range of packaged products which is suitable for the client, no recommendation must be made.
(3) In making the recommendation or effecting the transaction in (1), the firm must have regard to:
(a) the facts disclosed by the client; and
(b) other relevant facts about the client of which the firm is, or reasonably should be, aware.
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COB 5.3.10A R (Requirement for suitability: whole-of-market advisers)
(1) A firm which holds itself out as giving personal recommendations to private customers on packaged products from the whole market (or the whole of a sector of that market) must not give any such personal recommendation unless it:
(a) has carried out a reasonable analysis of a sufficiently large number of packaged products which are generally available from the market (or sector of the market); and
(b) conducts the analysis in (a) on the basis of criteria which reflect adequate knowledge of the packaged products generally available from the market as a whole (or from a relevant sector).
(2) A firm in (1) must satisfy the obligation in COB 5.3.5 R (2) by taking reasonable steps to ensure that a personal recommendation given to a private customer is:
(a) in accordance with its analysis carried out under (1); and
(b) is the packaged product which on the basis of that analysis is the most suitable to meet the customer's needs.
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COB 5.3.14 R (Requirement for a suitability letter: other specific requirements)
(1) A firm that gives a personal recommendation, in relation to a life policy, to a person who is a policyholder or a prospective policyholder of a life policy, must provide the person with a suitability letter prior to the conclusion of the contract, unless one of the exceptions in COB 5.3.19 R applies.
(2) If, following a personal recommendation by a firm that does not fall within (1), a private customer:
(a) buys, sells, surrenders, converts, cancels, or suspends premiums for or contributions to, a pension contract or a stakeholder pension scheme; or
(b) elects to make income withdrawals ; or
(c) acquires a holding in, or sells all or part of a holding in, a scheme; or
(d) enters into a pension transfer or pension opt-out from an OPS;
the firm must provide the customer with a suitability letter, within the time period stipulated by COB 5.3.18 R, unless one of the exceptions in COB 5.3.19 R applies.
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COB 5.4 - Customers' understanding of risk
This section applies to a firm that conducts designated investment business with or for a private customer but does not apply to a firm when providing basic advice on a stakeholder product.
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COB 5.4.3 R (Requirement for risk warnings)
A firm must not:
(1) make a personal recommendation of a transaction; …
to or for a private customer unless it has taken reasonable steps to ensure that the private customer understands the nature of the risks involved.
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COB 5.4.7 E (Risk warnings in respect of non readily realisable investments)
In relation to a transaction in a designated investment that is not a readily realisable investment, a firm should:
(1) warn the private customer that there is a restricted market for such designated investments, and that it may therefore be difficult to deal in the designated investment or to obtain reliable information about its value; ...."
Of all these rules, the most important in the present context, and the one to which most argument was directed at the trial, is rule 5.3.5, in particular rule 5.3.5(2)(a).
"This guidance is issued under section 157 of the Act (Guidance). It represents the FSA's views and does not bind the courts. For example, it would not bind the courts in an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Actions for damages)), or in relation to the enforceability of a contract where there has been a breach of sections 19 (The general prohibition) or 21 (Restrictions on financial promotion) of the Act (see sections 26 to 30 of the Act (Enforceability of agreements)). Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Act and to the relevant secondary legislation to find out the precise scope and effect of any particular provision referred to in the guidance and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates."
"PERG 5.8.8 In the FSA's view, advice requires an element of opinion on the part of the adviser. In effect, it is a recommendation as to a course of action. Information, on the other hand, involves statements of facts or figures.
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PERG 5.8.9 In general terms, simply giving information, without making any comment or value judgement on its relevance to decisions which a person may make, is not advice. In this respect, it is irrelevant that a person may be providing information on a single contract of insurance or on two or more. This means that a person may provide information on a single contract of insurance without necessarily being regarded as giving advice on it. PERG 5.8.11 has guidance on the circumstances in which information can assume the form of advice.
PERG 5.8.10 In the case of article 53, information relating to buying or selling contracts of insurance may often involve one or more of the following:
(1) an explanation of the terms and conditions of a contract of insurance whether given orally or in writing or by providing leaflets and brochures;
(2) a comparison of the features and benefits of one contract of insurance compared to another;
(3) the production of pre-purchase questions for a person to use in order to exclude options that would fail to meet his requirements; such questions may often go on to identify a range of contracts of insurance with characteristics that appear to meet the person's requirements and to which he might wish to give detailed consideration (pre-purchase questioning is considered in more detail in PERG 5.8.15 to PERG 5.8.19 (Pre-purchase questioning (including decision trees));
(4) tables that compare the costs and other features of different contracts of insurance;
(5) leaflets or illustrations that help persons to decide which type of contract of insurance to take out; and
(6) the provision, in response to a request from a person who has identified the main features of the type of contract of insurance he seeks, of several leaflets together with an indication that all the contracts of insurance described in them have those features.
PERG 5.8.11 In the FSA's opinion, however, such information is likely to take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. Examples of situations where information provided by a person (P) might take the form of advice are given below.
(1) P may provide information on a selected, rather than balanced and neutral, basis that would tend to influence the decision of a person. This may arise where P offers to provide information about contracts of insurance that contain features specified by the person, but then exercises discretion as to which complying contract of insurance to offer to that person.
(2) P may, as a result of going through the sales process, discuss the merits of one contract of insurance over another, resulting in advice to enter into a particular one. In contrast, advice on how to complete an application form, without an explicit or implicit recommendation on the merits of buying or selling the contract of insurance whilst 'advice' in the general sense of the word, is not, in the view of the FSA, advice within the meaning of article 53. Such advice may, however, amount to arranging (for which see PERG 5.6.1 to PERG 5.6.4 (The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance)).
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PERG 8.28 Advice or information
PERG 8.28.1 In the FSA's view, advice requires an element of opinion on the part of the adviser. In effect, it is a recommendation as to a course of action. Information, on the other hand, involves statements of fact or figures.
PERG 8.28.2 In general terms, simply giving information without making any comment or value judgement on its relevance to decisions which an investor may make is not advice.
PERG 8.28.3 Information may often involve:
(1) listings of share and unit prices; or
(2) company news or announcements; or
(3) an explanation of the terms and conditions of an investment; or
(4) a comparison of the benefits and risks of one investment as compared to another; or
(5) league tables showing the performance of investments of a particular kind against set published criteria; or
(6) details of directors' dealings in the shares of their own companies; or
(7) alerting persons to the happening of certain events (for example, XYZ shares reaching a certain price).
PERG 8.28.4 In the FSA's opinion, however, such information may take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. For example:
(1) a person may offer to provide information on directors' dealings on the basis that, in his opinion, were directors to buy or sell investors would do well to follow suit;
(2) a person may offer to tell a client when certain shares reach a certain value (which would be advice if the person providing the information has offered to do so on the basis that the price of the shares means that it is a good time to buy or sell them); and
(3) a person may provide information on a selected, rather than balanced, basis which would tend to influence the decision of the recipient.
PERG 8.29 Advice must relate to the merits (of buying or selling a particular investment)
PERG 8.29.1 Advice must relate to the buying or selling of an investment - in other words, the pros or cons of doing so.
PERG 8.29.2 An explanation of the implications of, for example, exercising certain rights or the happening of certain events (such as death) need not involve advice on the merits of exercising those rights or on what to do following the event.
PERG 8.29.3 Neither does advice on the merits of using a particular stockbroker or investment manager in his capacity as such amount to advice for the purpose of article 53. This is because it is not advice on the merits of buying or selling an investment.
PERG 8.29.4 Advice in the form of rating issuers of debt securities as to the likelihood that they will be able to meet their repayment obligations need not, of itself, involve any advice on the merits of buying, selling or holding on to that issuer's stock.
PERG 8.29.5 Without an explicit or implicit recommendation on the merits of buying or selling an investment, advice will not be covered by article 53 if it is advice on:
(1) the likely meaning of uncertain provisions in an investment agreement; or
(2) how to complete an application form; or
(3) the value of investments for which there is no ready market; or
(4) the effect of contractual terms and their commercial consequences; or
(5) how to structure a transaction to comply with regulatory, competition and taxation requirements; or
(6) terms which are commonly accepted in the market.
PERG 8.29.6 Advice as to what might happen to the price or value of an investment if certain events were to take place, however, may be covered by article 53 in some circumstances."
The rival contentions
When was the contract made?
"This is an important document that you should keep for future reference. It provides details of our current terms of business, outlining the extent of the relationship you are entering into with us and on what basis we will have authority to act for you where we give advice. These terms of business come into force when received by you as a customer."
Applying the conventional test of offer and acceptance, the proffering of these terms was in my judgment no more than an invitation to treat whereby the bank conveyed to Mr Rubenstein the terms on which it was willing to provide its services to him. It did not of itself give rise to a contract. On the other hand I see no reason why it was essential that Mr Rubenstein should have expressly agreed to pay any particular fee before any contract came into being. It would have been enough if he had stated that he wanted the bank to act for him on the bank's terms of business and the bank had agreed to do so.
Was the contract one for advice or "execution only"?
"Of the two funds available, I recommend that you invest in the Enhanced Variable Rate Fund because the fund aims to generate growth rates of around 0.25% net higher than the Standard Fund, whilst maintaining a very high degree of safety and liquidity. The fund invests in a variety of money market securities and uses AAA, AA and A rated institutions. As the fund has the ability to invest up to 25% in A rated institutions, it carries a very slightly higher risk than the Standard Fund which only uses AAA and AA rated companies. The rate of return depends on the amount invested and the net yield currently available for your anticipated level of investment into this fund is > %."
Mr Marsden never sent the letter of recommendation to Mr Rubenstein; but it is odd that it was promised if Mr Marsden believed that he was providing an execution only service.
"To the extent that Mr Marsden may have provided your client with advice, taking into consideration Mr Rubenstein's requirements, namely a short term home for the funds and the facility to make withdrawals, the AIG Premier Access Bond contained the necessary features to meet these needs. With regard to the security aspect of the investment, Mr Marsden's statement that "we view this investment as the same as cash deposited in one of our accounts" was not we believe at the time unreasonable or misleading."
The letter then rejected the complaint on the ground that the loss was caused by the "extreme economic conditions" rather than "the advice provided".
What constitutes "advice"?
"In my judgment it is neither appropriate in the context of the 1986 Act, nor for that matter would it be realistic, to seek to limit the concept of "investment advice" by reference to the extent to which the advice relates to the "merits" (i.e. to the advantages or disadvantages) of a particular "investment" as defined; and if that be accepted, it seems to me that it must follow that the concept of "investment advice" will comprehend all financial advice given to a prospective client with a view to or in connection with the purchase, sale or surrender of an "investment", including advice as to any associated or ancillary transaction notwithstanding that such transaction may not fall within the definition of "investment business" the purposes of the 1986 Act."
"The prohibition of the giving of investment advice does not extend to the giving of purely factual information. However, it can often be difficult to say where the dividing line falls. This difficulty is recognised in Scottish Equitable's Compliance Manual, where some examples are given in both the 1995 and the 1999 versions by way of guidance. Thus the provision of purely factual information about a transfer value, the differences between with-profits and unit-linked policies, the shareholdings of a fund, or the investment strategy of a fund would all be acceptable; but on the other hand advice on whether to effect a transfer, whether with-profits or unit-linked would be better for an investor, whether to switch to a particular fund, or whether a fund is low or high risk would all constitute investment advice. The claimant's expert witness on liability, Mr Patrick Storey, agreed that these were good examples. I also agree, and would add that any element of comparison or evaluation or persuasion is likely to cross the dividing line. However, the provision of purely factual information does not become objectionable merely because it feeds into the client's own decision-making process and is taken into account by him. It is obvious that any informed decision making requires the provision of accurate information and will be based upon it."
Was advice given to Mr Rubenstein?
Was the advice negligent or such as to constitute a breach of contract?
Was there a breach of statutory duty?
Did Mr Rubenstein rely on the Bank's advice?
What is the recoverable loss?
"... did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally i.e. in the usual course of things, or to be supposed to have been in the contemplation of the parties. Indeed the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which, on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of cases."
The calculation of the loss
Contributory negligence
The ex gratia payment
Conclusion