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What’s the price of poor financial advice?
16 February 2012

There has been much publicity in recent times concerning claims against banks for misselling products, but the recent case of Zaki and others –v- Credit Suisse (UK) Ltd [2011]is a good example of the difficulties facing claimants when making such claims, in particular the need to establish not only breach of duty on the part of the financial advisor, but also that loss was caused as a result of the breach of duty.

The case concerned a very wealthy and successful businessman, Mr Zeid, who had considerable experience of financial services and banking and had been used to purchasing various structured financial products from the defendant bank as well as other banks. The case concerned ten particular structured products which were purchased by Mr Zeid or his family between February 2007 and June 2008 (the “Notes”). These investments were linked with equity markets of banking stocks and were leveraged, involving purchase through the assistance of loans. They were investments that could lead to very high returns while at the same time carrying potentially substantial risk.

As events turned out during the financial crisis in October 2008 the defendant bank issued a margin call, which Mr Zeid failed to meet, and as a result Credit Suisse liquidated the ten products causing Mr Zeid and his family to suffer a loss of nearly £70million.

A claim was then brought against Credit Suisse alleging breach of its duty to comply with the FSA Conduct of Business Rules and FSA Conduct of Business Sourcebook Rules in the advice that it gave to Mr Zeid in connection with the investments.

The key issues which the court had to address were firstly whether the defendant had simply sold the ten notes to Mr Zeid or had gone further than this and recommended their purchase, i.e. gave advice favouring their purchase. Secondly the court had to address whether the notes had been a suitable investment for Mr Zeid in the circumstances, if the claimant was successful in asserting that the notes had been acquired following a recommendation from the bank. Lastly it was necessary for the claimants to prove that if Mr Zeid had been given different, more appropriate, advice he would not have gone ahead and purchased the notes, giving rise to the subsequent losses.

The court ruled that Mr Zeid was to be viewed as a private customer and retail client for the purposes of the FSA Rules and that accordingly the bank was under a duty to ensure that any advice given to Mr Zeid was suitable.

Unfortunately Mr Zeid died in 2010, and so his widow and daughters continued the action to trial.

The court found that the defendant’s representative did recommend, and therefore advise as to the merits of purchasing the investments, rather than simply provide information about them.

The court also found that it was probable Mr Zeid had understood the structure of the notes, and the risks associated with holding them as well as the risks associated with leverage. The court found that there was no evidence to suggest that Mr Zeid was unable to afford these risks. Accordingly it considered that the advice given insofar as it related to the first seven notes had been suitable. However the same could not be said of the last three notes, as by the time of their purchase the market had become extremely volatile with an increased risk of margin calls having to be made, and insufficient advice had been given to Mr Zeid about the suitability of the investments in the changed market conditions.

However the claimants failed to establish that on the balance of probabilities Mr Zeid would have behaved any differently, and not proceeded with the purchase of the last three notes, if he had been given appropriate advice. The court felt that as an experienced businessman being inclined to rely on his own judgment while declining advice from others, he would have proceeded with the purchase, and accordingly no loss could be attributed to the inadequate advice given by the bank in relation to the last three notes.

The court has to make what can be very delicate judgments on issues of causation. The burden of proof lies with the claimant and no doubt in this case Mr Zeid’s family would have been hampered by the fact that Mr Zeid was unable to give evidence in court as to what he would have done if he had been given the correct advice. Having said this any judge dealing with a claim for professional negligence will be slow to accept at face value assertions from a claimant as to what he would have done if he had been given adequate advice about an investment that has gone wrong. The benefit of hindsight can and often does colour the objectivity of a claimant’s evidence in cases of this nature.

For more information about the issues raised in this article or to find out more about how the Dispute Resolution team can help you please contact Mike Robinson on 0118 952 7206 or email [email protected].

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.

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