Rubenstein v HSBC Bank Plc

An investment adviser who recommends a product must assess its suitability for the particular customer, rather than risk in the abstract. Where statutory duties require the adviser to understand the customer, explain risk and recommend a suitable product, those purposes inform the scope of corresponding duties in contract and tort.

A loss is not too remote merely because an extreme market event produced an unforeseeably large loss. Where the adviser’s duty was to protect the customer from exposure to market risk, capital loss caused by that risk falls within the duty even though its scale and timing were unexpected. An adviser who wishes to limit responsibility by reference to an investment period may need to communicate that limitation clearly.

A private customer sought a safe, readily accessible investment for the proceeds of his home. He could not accept capital risk and expected, without certainty, to buy another home within about a year. HSBC advised him to invest in an enhanced variable rate fund, representing it as equivalent to cash. The fund was instead exposed to market movements.

Following market turmoil in 2008, the customer suffered capital loss. HHJ Havelock-Allan QC found negligent advice, breach of contract and breaches of the FSA Conduct of Business Rules, but awarded only nominal damages because the loss was considered unforeseeable and too remote: [2011] EWHC 2304 (QB).

The customer appealed on remoteness and the treatment of a later ex gratia payment. HSBC challenged the findings concerning contract, negligence and suitability.

1. Disposition. The customer’s appeal was allowed on remoteness but dismissed concerning the ex gratia payment. HSBC’s challenges to negligence, breach of the suitability rule and contractual liability failed. The customer was entitled to damages calculated in accordance with the judge’s alternative findings, less £7,195.23.
2. The recommended fund was not equivalent to a cash deposit. Its value depended upon market assets, and the investor had no right to the return of a fixed principal sum. Suitability had to be assessed by reference to this customer’s requirement for the minimum possible risk. The apparently benign short-term outlook did not make the fund suitable. The adviser misunderstood the customer and the product, failed to consider safer alternatives and gave misleading advice. The judge had therefore correctly found negligence and breaches of the substantive Conduct of Business Rules.
3. The statutory purpose of the Conduct of Business regime was to provide carefully balanced protection to private consumers. Its requirements were designed to ensure that advisers understood their clients and that clients understood investment risk. That statutory purpose informed the scope of the related duties in contract and tort.
4. The customer’s loss resulted from the fund’s exposure to falling market values. The collapse of Lehman Brothers and the scale of withdrawals did not constitute an extraneous cause severing responsibility. Market loss was the very risk which made the product unsuitable and from which the bank was required to protect the customer. The scale of the loss was unexpected, but it remained loss of a foreseeable kind. The trial judge had therefore selected the wrong legally relevant cause and had erred in treating the loss as too remote.
5. The customer’s anticipated investment period did not confine the duty to one year. The investment was to continue until another home was bought, which was an uncertain period. HSBC had represented the product as an instant-access cash equivalent and had said further advice would be unnecessary. In that context, a three-year period was not materially different from an indefinite period of about a year. Any relevant time limitation should have been made clear by the recommending expert.
6. The advice was given and received on the basis that a fee would be paid under HSBC’s charging arrangements. Contractual responsibility therefore arose even though the formal fee document was signed when the investment was made.
7. The later ex gratia payment represented recoveries from assets held within the fund. It was part of the continuous investment transaction rather than an independent benevolence and had to be credited against damages.

1. Court of Appeal (Civil Division): By [2012] EWCA Civ 1184, allowed the customer’s appeal on remoteness, dismissed his appeal concerning the ex gratia payment, and rejected HSBC’s challenges to the findings of liability.
2. Queen’s Bench Division, Bristol Mercantile Court: HHJ Havelock-Allan QC found negligent advice, breach of contract and breaches of the FSA Conduct of Business Rules, but held that the loss was unforeseeable and too remote and awarded nominal contractual damages: [2011] EWHC 2304 (QB).