Zaki & Ors v Credit Suisse (UK) Ltd

A recommendation concerning a structured investment is advice on its merits, rather than the mere provision of information, where the adviser expresses or conveys an opinion in context. Suitability must be assessed by reference to the client’s knowledge and experience, financial situation and investment objectives. It ordinarily requires consideration of substantial leverage, because leverage increases both potential loss and the risk of a margin call. Portfolio diversification may also be relevant. Regulatory deficiencies in gathering information do not themselves establish that an investment was unsuitable. A breach of the suitability duty causes actionable loss only if the loss resulted from that breach. Where the client would have made the same investment on his own judgment, causation is not established.

The claimants, successors in title to Mohamed Magdy Zeid and joint account holders with him, claimed approximately US$69.4 million from Credit Suisse (UK) Ltd. The loss followed the liquidation of leveraged structured products after a margin call in October 2008.

The claim was advanced under section 150 of the Financial and Services Markets Act 2000 for alleged breaches of the FSA’s Conduct of Business Rules and Conduct of Business Sourcebook Rules. The central issues were whether the bank had made personal recommendations, whether the recommendations were suitable, whether the bank had taken reasonable steps regarding risk and leverage, and whether any breach caused the loss.

1. The claim was dismissed. The court found no breach in relation to notes 1–7. Notes 8–10 were unsuitable and their recommendation breached COBS 9.2.1, but the claimants failed to prove that the breach caused their loss.

2. A personal recommendation is advice on the merits of purchasing a particular investment. It requires an element of opinion. The distinction between advice and information depends on the context. Applying that approach, the court found that the bank had recommended all ten notes.

3. Suitability required consideration of the client’s knowledge and experience, financial situation and investment objectives. The client understood the essential structure and risks of the products, had substantial resources and sought enhanced returns. Leverage was also relevant because it increased potential loss and the risk of a margin call. The court rejected the view that financing was wholly separate from suitability.

4. The court treated diversification as relevant. It nevertheless found notes 1–7 suitable, despite their leverage and predominantly equity-linked character, because the client understood the risks, could bear them and pursued high returns.

5. Notes 8–10 were purchased in May and June 2008 amid substantial market volatility, with an already concentrated equity exposure, significant leverage and an increased loan-to-value ratio. The bank failed to take reasonable steps to assess suitability in those circumstances. It did not adequately consider diversification, leverage, volatility or the client’s available liquidity.

6. Section 150 required loss to be suffered as a result of the breach. The court accepted, for present purposes, the claimants’ proposed approach that it was sufficient to show that the client would not have invested if no recommendation had been made. On the evidence, however, he would have bought notes 8–10 based on his own market views, even if advised that they were unsuitable. Causation therefore failed.

First instance decision. No prior appellate decision is stated in the judgment.