Zaki v Credit Suisse (UK) Ltd (Court of Appeal)

The Court of Appeal dismissed the appeal. The appeal concerned whether the Conduct of Business rule COB 7.9.3 (restrictions on lending to private customers) was engaged in respect of individual draw‑downs used to purchase leveraged structured products and, if engaged, whether the bank breached its duties under COB 7.9.3 and/or the suitability rule in COB 5.3.5. The court held that COB 7.9.3 applied to the transactions in question and that the bank had in practice helped to arrange the group lending (the Framework Credit Limit). However, the trial judge had found that the bank’s personal recommendations and the overall transactions (including leverage) were suitable for the investor under COB 5.3.5. The Court of Appeal concluded that (i) the narrower suitability enquiry under COB 7.9.3 is subsumed where a personal recommendation is found to be suitable under COB 5.3.5, (ii) defects in process (COB 7.9.3(1)) do not of themselves require liability if the lending and recommendation were in substance suitable, and (iii) causation and scope limited recovery in any event. For these reasons the appellants’ challenge failed.

This is an appeal from a trial in the Commercial Court (Teare J) in which the claimants, the widow and daughters of an investor (the Zeid family), sued Credit Suisse (UK) Ltd for statutory breaches under the Conduct of Business Rules arising out of the purchase of leveraged structured products (Callable Bullish Notes or CDIs) that were later liquidated in October 2008, producing an agreed loss of US$69.4m.

Nature of the claim: a claim in statutory duty only (not in contract or tort), alleging that the bank breached COB 7.9.3 (restrictions on lending to private customers) and COB 5.3.5 (suitability of personal recommendations) in respect of notes 1–7 which were bought before 1 November 2007 (the COB era). The case also involved notes 8–10 bought after COBS came into force; the judge found those unsuitable but held there was no causative loss for them.

Procedural history: trial judge (Commercial Court, Teare J) found for the bank on notes 1–7 (suitable) and for the bank on causation for notes 8–10; the Zeid family appealed to the Court of Appeal [2013] EWCA Civ 14.

Issues framed:

• whether COB 7.9.3 applies to individual draw‑downs or only to overarching facility grants;
• whether CSUK "arranged" lending by Credit Suisse AG (CSAG) and so fell within the prohibition on arranging lending;
• whether the bank complied with COB 7.9.3(1) (assessment and recording of financial standing) and (2) (taking reasonable steps to ensure loan arrangements and amount were suitable);
• whether the suitability enquiry under COB 7.9.3 is the same as the suitability requirement in COB 5.3.5 and, if different, whether the narrower test could bite where the judge had already found suitability under COB 5.3.5;
• causation, scope of duty and contributory negligence.

Court’s reasoning and disposition: the Court of Appeal held that CSUK did in practice assist in arranging the Framework Credit Limit and that COB 7.9.3 can engage in respect of the individual transactions (draw‑downs). Nevertheless, the judge had made express findings that the personal recommendations and the transactions (including leverage) were suitable for Mr Zeid under COB 5.3.5: the Court held that the narrower COB 7.9.3(2) enquiry would be subsumed by such a finding, and that failures of process under COB 7.9.3(1) would not by themselves convert otherwise suitable recommendations or lending into actionable breaches causing full loss. The court emphasised the role of causation and established authorities limiting scope of duty and noted that contributory negligence remained available as a defence. Given the trial findings on suitability and causation, the appeal was dismissed.

The Court of Appeal dismissed the appeal. The court held that COB 7.9.3 did apply to the transactions and that CSUK had assisted in arranging the group lending, but that the trial judge’s express findings that the bank’s recommendations and the funded transactions (including leverage) were suitable under COB 5.3.5 meant that no actionable breach of COB 7.9.3(2) was established in respect of notes 1–7; procedural defects under COB 7.9.3(1) did not alter that conclusion and causation and scope principles further limited recovery.

Appeal from the Queen's Bench Division, Commercial Court (Teare J, 2009 folio 1393); judgment of the Court of Appeal reported at [2013] EWCA Civ 14.