Abdullah & Ors Credit Suisse (UK) Ltd & Anor

Suitability duties require an investment adviser to assess not only whether a client understands a product, but also whether the magnitude of its risks fits the client’s risk appetite. Presenting a materially riskier product to an advisory client requires particular care, including making the increased risk clear. Standard risk warnings may not address the magnitude of market risk. A recommendation may arise from information accompanied by comment or value judgment, or from a selective presentation intended to influence the client. A client’s decision not to meet a margin call does not automatically break causation or constitute contributory negligence; the question is fact-sensitive. The decision is unreasonable only where the evidence supports that conclusion.

The claimants, members of a wealthy family, invested in leveraged structured products through the defendants’ private banking business. They alleged breaches of statutory duties under the Conduct of Business Rules when Notes 18, 19 and 20 were recommended and sold in 2008.

The court considered whether the recommendations were suitable for the claimants’ investment objectives and risk appetite, whether communications were fair, clear and not misleading, whether any breaches caused the losses, and whether the claimants acted unreasonably by declining to meet a margin call during the October 2008 market crisis.

1. Note 18. The relationship between the claimants and the relationship manager was advisory. His presentation and recommendation of Note 18 amounted to a personal recommendation. Although the claimants understood the product’s essential terms and had sufficient financial capacity, they relied on him to evaluate the likelihood of barrier breaches. Their appetite was generally conservative, involving only a very low risk of capital loss. The assessment that Note 18 involved only a small chance of loss had no reasonable basis. Credit Suisse therefore contravened COBS 9.2.1R and 9.2.2R. The same communication was misleading under COBS 4.2.1R, although that breach added little to the suitability breach.
2. Note 19. This was a high-risk investment, but the claimants understood that it was a bold and risky investment and knowingly accepted that risk in respect of a modest proportion of their wealth. The suitability and fair-communication claims concerning Note 19 therefore failed.
3. Note 20. The restructuring was sought in exceptional market conditions and was designed to satisfy objectives independently formulated by the claimants and their adviser. It satisfied those objectives and the suitability claim failed. However, assurances that the switch would require no further funds were misleading because the restructuring caused a collateral shortfall and margin call. Credit Suisse thereby breached COBS 4.2.1R, although the breach would not increase the damages once the counterfactual absence of Note 18 was taken into account.
4. Causation and mitigation. But for the purchase of Note 18, the claimants would have held a smaller, restructured portfolio without a later margin call. The losses fell within the scope of the duty breached. The decision not to meet the October margin call was rationally based on concern that further funds might be lost. It was not unreasonable, did not break the chain of causation, and did not amount to contributory negligence.
5. The claim succeeded. Damages were to be assessed by comparing the actual outcome with the counterfactual outcome identified by the court. The damages could be set off against the overdraft, and Credit Suisse’s counterclaim was dismissed.