Zaki & Ors v Credit Suisse (UK) Ltd

COB 7.9.3 applies to individual draw-downs used to finance particular investments, as well as to overarching credit facilities. A firm may arrange lending by an associated group company without controlling that company's decision to lend. The lending suitability test is narrower than the general investment suitability test, but is subsumed where a personal recommendation is found suitable after considering leverage. A procedural failure does not automatically create liability if the lending was in fact suitable, although it requires careful scrutiny of the firm's case. The appeal was dismissed.

The claim arose from the liquidation of leveraged structured products purchased by Mohamed Magdy Zeid through a joint family account. The appellants alleged that Credit Suisse (UK) Ltd had breached statutory duties under the Financial Services and Markets Act 2000 regulatory scheme and the applicable COB rules, particularly the restrictions on lending to private customers.

Mr Justice Teare gave judgment for the bank. The appeal concerned notes 1–7 and addressed whether COB 7.9.3 applied to individual draw-downs, whether the bank had arranged the associated lending, how its suitability requirements interacted with COB 5.3.5, and whether any breach caused the claimed losses.

The appeal was dismissed unanimously. Lord Justice Rix gave the leading judgment, with Lord Justice Patten and the Chancellor of the High Court agreeing.

1. The bank had arranged the lending facility within COB 7.9.3. The expression referring to arranging lending by another person did not require the bank to control the lender's decision. It covered the practical assistance provided by the bank's employees and assistants in procuring finance from an associated Credit Suisse company.
2. COB 7.9.3 applied to the individual advances used to purchase notes 1–7, not merely to the overarching credit facility. The required assessment and reasonable steps could be updated at the time of each draw-down, particularly where circumstances changed.
3. The assessment and recording obligation in sub-rule (1) facilitated the substantive suitability obligation in sub-rule (2). A process failure would not itself impose liability where the lending arrangements were in fact suitable, although such a failure would require careful and, if necessary, sceptical scrutiny of the firm's case. The evidence did not establish a breach of sub-rule (1). An under-estimate of wealth based on information disclosed by the customer was not, in these circumstances, a breach, and liquidity had not been raised as an issue at trial.
4. The tests under COB 5.3.5 and COB 7.9.3(2) were distinct. The latter was narrower, but where the personal recommendation was found suitable after considering the leverage, the lending suitability enquiry was subsumed. Leverage and its extent were relevant to both tests. The judge was entitled to find that notes 1–7 were suitable for Mr Zeid, given his experience, understanding of the risks and ability to bear them. The appellate court could not reopen those factual findings absent an error of law or principle.
5. Obiter, even a breach of COB 7.9.3 would not necessarily make the bank liable for every loss. Causation and scope of duty remained separate questions. The prohibitory wording did not enlarge the scope of the duty automatically. If only leverage above a suitable level were defective, recovery might be confined to loss attributable to that excess. The scope-of-duty authorities included South Australia Asset Management Corporation v. York Montague Ltd [1997] AC 191, Nykredit Mortgage Bank plc v. Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, Aneco Reinsurance Underwriting Ltd v. Johnson & Higgins Ltd [2002] 1 Lloyd's Rep 157 and Haugesund Kommune v. Depfa ACS Bank (No 2) [2011] EWCA Civ 33.
6. Obiter, contributory negligence could be available for breach of a COB rule, including where the rule protected a customer against his own decisions.

• Court of Appeal (Civil Division): In [2013] EWCA Civ 14, the appeal concerning notes 1–7 was dismissed.
• Queen's Bench Division, Commercial Court: Mr Justice Teare gave judgment for Credit Suisse (UK) Ltd in claim 2009 Folio 1393.