Rubenstein v HSBC Bank plc

This appeal concerned negligent financial advice and breaches of the Financial Services Authority's Conduct of Business (COB) rules given to a private retail customer who sought a safe place for the proceeds of a house sale. The trial judge found that the bank and its adviser breached COB rules (including COB 2.1.3R, COB 5.3.5R and COB 5.4.3R), and were negligent and in breach of contract, but awarded only nominal damages because he held the investor's loss was caused by unforeseeable and too remote market turmoil in 2008. The Court of Appeal allowed the appeal in part, holding that the statutory and common law duties owed to a private retail client required the adviser to guard against the risk of market loss which in this context was reasonably foreseeable and within the scope of the bank's duty; accordingly the trial judge was wrong to find the loss too remote.

Background and parties: Mr Adrian Rubenstein, a private retail customer, sought a safe place for £1.25m in 2005 pending purchase of a new home. HSBC private client adviser Mr Marsden recommended investing in AIG's Premier Access Bond (PAB), specifically the Enhanced Variable Rate Fund (EVRF). Mr Rubenstein said he could not afford to risk capital loss and expected to need the money within about a year.

Procedural posture: At first instance HHJ Havelock-Allan QC ([2011] EWHC 2304 (QB)) found the bank had given advice, breached multiple COB rules and was negligent, but held the claimant suffered no recoverable loss because the capital loss in 2008 was caused by exceptional market turmoil and so was unforeseeable and too remote. Both parties were given permission to appeal; HSBC cross-appealed limited issues and the claimant appealed on causation and remoteness. This Court heard the appeal.

Nature of claim / relief sought: The claim combined damages for breach of statutory duty under section 150 FSMA (breach of COB rules), negligence and breach of contract arising from the recommendation to invest in the EVRF. The claimant sought compensatory damages (net of tax and credit for any payments) for capital loss compared with suitable alternatives (deposits or the more cautious SVRF).

Issues framed by the court:

• Whether the bank/adviser breached COB rules and was negligent, and whether there was a binding contract for advice;
• causation: whether but for the negligent advice the claimant would not have invested in the EVRF;
• foreseeability and remoteness / scope of duty: whether the type of loss that occurred in 2008 was within the scope of the bank's responsibility given the customer's short expected holding period; and
• whether an ex gratia payment by AIG (ALICO) should be credited against damages.

Court's reasoning and resolution: The Court of Appeal (Rix LJ, with Lloyd and Moore-Bick LJJ agreeing) accepted the trial judge's factual findings that advice was given, that the adviser mischaracterised the EVRF as equivalent to cash and failed to consider more suitable alternatives (notably the SVRF or deposit arrangements), and that multiple COB rules were breached. On remoteness and scope of duty the court disagreed with the trial judge. Having regard to the statutory purpose of COB and FSMA's consumer protection objective, and the factual context in which the customer made clear he could not afford loss of capital and had been told his investment was equivalent to cash, the court held that exposure to market-driven capital loss was the relevant risk and was within the scope of the bank's duty. The extraordinary market events of 2008 were not treated as breaking the causal chain so as to make the loss too remote. The claimant's appeal on remoteness succeeded; his appeal on the treatment of the ex gratia payment failed.

Appeal allowed in part. The Court of Appeal upheld the trial judge's factual findings of negligent advice and breaches of COB rules but disagreed that the claimant's loss was too remote; the statutory and common law duties owed to a private retail client meant exposure to market-driven capital loss from an unsuitable product was within the bank's scope of responsibility and therefore recoverable. The court dismissed the claimant's challenge to the treatment of the ex gratia payment.

Appeal from the Queen's Bench Division (Bristol Mercantile Court), HHJ Havelock-Allan QC, [2011] EWHC 2304 (QB). Permission to appeal was given to both parties by the trial judge; the bank's cross-appeal was treated as respondent's notice in this Court. Hearing in the Court of Appeal (Civil Division) 9–10 May 2012; judgment [2012] EWCA Civ 1184 (12 September 2012).