The question of whether there is a duty of care owed to an investor in the complex field of financial advice is a complicated area, fraught with difficulties. In the professional negligence compensation claim case of Rubenstein v HSBC Bank Plc  EWHC 2304 (QB) the court was asked to consider whether there was an advisory relationship between the claimant and the defendant, giving rise to a duty of care being owed to the claimant.
The claimant wished to invest the proceeds of the sale of his home whilst continuing to search for a new property. In August 2005 the claimant sought advice from the defendant bank and said that he wanted advice over where he could obtain the most favourable rate of interest as the advertised rates were not very favourable. The claimant also stated that he needed ready access to the money.
The advisor at the defendant bank initially provided the claimant with details of one of fourteen funds in an insurance based bond. The advisor later set out the claimant’s choices as to how the bank could be remunerated for his services.
The claimant explained that he could not risk any of the capital and asked for clarification of any risk associated with the fund. The bank’s advisor told the claimant that the risk of investing in the fund was the same as for cash in a deposit account. The following month the claimant placed the sale proceeds of £1.25 million in the fund.
The money remained in the fund until serious turmoil in the financial markets occurred in the week beginning 15 September 2008 when the claimant attempted to withdraw his money. The professional negligence claim hinged on the basis that the claimant received less than his capital investment from the fund and therefore attempted to recover his loss from the bank, on the basis that he had been wrongly advised to invest in the fund.
The issues that the court considered, with regards to the professional negligence claim, were (i) whether a binding contract was formed when the money was paid into the fund or when the claimant returned the remuneration form, (ii) whether the contract was for advice or for execution of the transaction only, to which different FSA rules applied, (iii) what constituted advice, (iv) whether the bank’s advisor had given advice, (v) whether the claimant had relied on the bank’s advice, (vi) causation and (vii) whether the bank had breached its statutory duty.
The court found that the starting point for confirming whether professional negligence had taken place was to consider the nature of the inquiry that is made.
If a client asked for a recommendation, any response was likely to be advice unless the response contained an express disclaimer. If a client made a purely factual enquiry then a reply that provided relevant information would be no more than information. In the relevant communications from the bank the information provided had the character of a recommendation. However, the test was whether an impartial observer, having knowledge of what had passed between the parties and of the regulatory regime, would conclude that advice had been given and therefore that the professional negligence claim was correct. Adopting that approach the court found that the bank had advised the claimant to invest in that specific fund.
In the judgment the court distinguished the case of Morgan Chase Bank v Springwell Navigation Corporation  EWHC 1186 (Comm) where the court treated the issue of whether negligent professional advice had been provided in a starkly different way.
In the Morgan Chase case, the defendant company, owned by two brothers, had invested heavily in emerging markets and had acquired, through the claimant bank, a portfolio of debt instruments including GKO-linked notes (“GKO’s”). These notes were derivative instruments referenced to bonds which were issued by the Russian Federation. The bank had invested profitably for some time however when Russia defaulted on certain of its financial obligations in August 1998 the value of the company’s portfolio collapsed and the company had to enter into a loan with the bank to pay off its liabilities.
The claimant bank sought a declaration of the court that it had no liability to Springwell. Springwell counter-claimed for damages and compensation arising out of the bank’s alleged professional negligence in their failure to properly advise Springwell in relation to its emerging markets investment.
The company claimed damages or compensation in respect of the loss in value of the investment on the basis that the bank was subject to a duty to advise the company on the suitability of investments and was in breach of that duty to advise.
The main thrust of the company’s professional negligence claim was that the portfolio of emerging markets investments, which it held at 17 August 1998, was one which no reasonable advisor could have advised it to have held. The company argued amongst other things, that if the bank had acted in accordance with its contractual, tortious and fiduciary duties, the company would have not held the portfolio that it held and it would have held a portfolio that was well-diversified, predominantly in low-risk liquid investments and structured in a way that there would have been no appreciable risk that the capital value of investments, or the portfolio itself, would be substantially reduced by factors such as a falling market.
The court held that the claimant bank did not owe the defendant company a contractual or tortious duty of care to advise it as to appropriate investments. The court stated that the lack of a written advisory agreement was a strong indication that there was no existing free-standing duty of care to give investment advice. In this case the defendant company was an experienced investor that concluded transactions over substantial periods of time on an execution-only basis and which, from time to time, had received expressions of opinion which could not in the circumstances be construed as advice.
The difference in the findings in these two cases highlight that in the complex field of financial advice and professional negligence claims, whether a duty of care is owed to an investor depends on whether the relationship is advisory or execution only which may itself depend, in part, on how experienced or sophisticated the investor is.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.