Jurisdiction - Hong Kong
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Singapore/Hong Kong – Investment Mis-Selling Claims: Recent Case-Law.

23 May, 2013


Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution


There have been a number of recent judgments dealing with financial product mis-selling claims brought by -customers against banks in the Hong Kong and Singapore courts.


The courts have so far generally taken a view of these cases that reflects the position taken by the defendant banks. However, this view will not be taken in all circumstances, and there are a number of important lessons that can be learnt from these judgments with a view to preventing successful claims where investments sold to private customers go wrong. This briefing analyses the recent case law, and also some recent UK cases, and seeks to identify some of these key lessons.


As a result of the downturn in the financial markets, an increasing number of wealthy private banking customers have been bringing claims against their banks for alleged mis-selling of investment products, which have resulted in often considerable losses for them. The investment products concerned are often complex and involve considerable risks (eg, forward accumulators and other structured products) and the customers, though usually very wealthy, have varying degrees of financial sophistication. The claims brought by disgruntled customers tend to be based on allegations of negligent misrepresentation, breach of contractual and/or tortious duties of care and breach of regulatory duties. Banks typically seek to rely on their standard terms to defeat the customer's claims, such as non-reliance, own-judgement, non-advisory and exclusion of liability clauses.


1. Hong Kong cases


Both of the recent Hong Kong cases in DBS Bank (Hong Kong Limited) v San-Hot HK Industrial Company Limited and Hao Ting [2013] HKEC 352 and Kwok Wai Hing Selina v HSBC Private Bank (Suisse) SA [2012] HKEC 903 (in which Herbert Smith Freehills acted for HSBC) related to the purchase of accumulator contracts. In both cases, the customers brought claims based on allegations that the relevant relationship managers (RM) had:


• represented that there was no or little risk involved in investing in the accumulators (DBS v San-Hot);

• assumed and then breached duties to advise the customer as to the suitability of the investments in light of the customer's risk tolerance (DBS v San-Hot and Kwok v HSBC); and/or

• breached an alleged duty to monitor the customer's account and to warn the customer that she was over-extending herself (Kwok v HSBC).


In both cases, the Court of First Instance placed considerable weight on the fact that the customers were sufficiently sophisticated and educated to understand, and did understand, the essential features of the investments and the risks and potential exposure attached to those investments. In both cases, the court found that the customers reached their own decisions after taking into account the recommendations and views of the RM, and that they were prepared to take risks in order to achieve potentially significant gains. These findings were relevant in the context of both the misrepresentation and the breach of duty claims, which are dealt with in more detail below.


In a similar vein, and bearing striking factual similarities to these two cases, the Commercial Court in England dismissed in March this year a mis-selling claim brought by an individual investor against Credit Suisse (who were represented by Herbert Smith Freehills London office) over the purchase of structured notes on a leveraged basis. In Basma Al Sulaiman v Credit Suisse Securities (Europe) Limited & anor [2013] EWHC 400 (Comm), the court held that the claimant had misrepresented her wealth, risk appetite, investment objectives, and experience with leveraged investments. Following a consideration of the communications between the claimant and the defendants and details about the claimant's other financial investments, the court found that there was no breach of regulatory or statutory, contractual or tortious common law duty. In particular, the court held that there was no regulatory requirement on an adviser to estimate or advise a customer on the probability or likely size of any margin call, nor was there any obligation on the adviser to satisfy himself that the client had sufficient assets to meet a margin call. 


Misrepresentation claims


In DBS v San Hok, the customer based her misrepresentation claim on common law, the Misrepresentation Ordinance and section 108 of the Securities and Futures Ordinance (SFO). However, based on the factual findings, including those regarding the customer's level of sophistication and understanding, the court found that no misrepresentations had been made and that the bank's representatives had accurately explained the essential features of the accumulators and had supplied the customer with promotional material which itself provided an adequate explanation of the essential features and risks involved.


Further, the court found that, even if there had been misrepresentations, the bank's standard terms established a contractual estoppel, which meant that the customer was estopped from asserting that she relied on any representations that may have been made, that she did not make independent decisions when deciding to invest in the accumulators, that she did not understand the essential characteristics of the investment and that she did not understand the risk associated with the investment. Although only obiter, this is potentially an important part of the judgment. The court considered both UK and Singapore case law on the point and concluded that the principle of "contractual estoppel" is a common law principle firmly established and settled in these types of cases after the English Court of Appeal's decision in Springwell Navigation Corp v JP Morgan Chase Bank and others [2010] EWCA Civ 1221 and that that principle also applies in Hong Kong. This means that parties may contractually agree to assume that a certain state of affairs is the case at the time the contract is concluded, even if that is not the case. In other words, parties may agree that no pre-contractual representations about the quality of an investment were made or relied upon and may be held to their agreement. There is no additional requirement that the party that wishes to rely on the estoppel (ie, the bank) has to show that it would be unconscionable for the other party (ie, the customer) to resile from the agreement or that the bank relied upon the agreed facts.


Singapore courts appear to take a slightly less bullish approach in applying the bank's standard terms (see below), and it should be noted that the court in DBS v San Hok did appear to place some reliance on the fact that the customer was clearly a sophisticated investor. There is therefore a question mark whether standard term non-reliance and no-representation clauses will offer the same protection to banks if the customer concerned is not sophisticated. There is a possibility that the courts may find that such clause or clauses fall foul of the reasonableness test under the Control of Exemption Clauses Ordinance (CECO) in the case of less sophisticated investors. On the other hand, the court in DBS v San Hok, again obiter, took a very restrictive pro-bank approach when determining whether and to what extent the various standard term clauses were exclusion or exemption clauses falling within the scope of CECO or were simply clauses which set out the nature and scope of the services that the bank contracted to provide (and which were therefore not subject of the CECO reasonableness test regardless of the sophistication of the customer).


Breach of professional duty claims


In both DBS v San Hok and Kwok v HSBC, the customer argued that the bank owed certain professional duties that were either implied into the contract or were owed in tort, based upon an alleged "assumption of responsibility". Duties pleaded included the duty to "manage" the customer's account, a duty to "advise" the customer, a duty to ensure that recommended investments were suitable for the customer's risk tolerance, a duty to ensure that the customer fully understood the nature and risks of the recommended products and a duty to "monitor" the customer's account and to warn the customer if the customer was overextending herself.


However, in both cases the court held that it was not possible to imply a duty into a contract which was contrary to its express terms, which stated, eg, that the relationship was execution-only, that the bank was not required to provide any advice, that any recommendation or house view provided should not be regarded as "advice", that the bank assumed no responsibility for the accuracy and completeness of any information provided, that the investment was made solely upon the customer's judgement and at the customer's discretion, and that the customer should obtain separate legal or financial advice.


Similar considerations negated an "assumption of responsibility" in tort. The court in both cases found that there could be no "assumption of responsibility" in light of the clear and express contractual terms that negated the very responsibility which the customer argued the bank had assumed.


Further, in DBS v San Hot, the court considered the customer's argument that the bank's standard term clauses could not be relied upon as they had not been specifically drawn to the customer's attention. The court rejected this argument, which was referred to as the "Interfoto" argument, based on the English case in Interfoto Library Ltd v Stiletto Ltd [1989] 1 QB 433. The court took a strong view that such an argument could not be raised where the contract containing standard terms had been signed by the customer and the customer knew that the document she was signing contained contractual terms, regardless of whether she had bothered to read them or not.


The SFC Code of Conduct


In both DBS v San Hot and Kwok v HSBC, the customer sought to rely on the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the "Code") as imposing actionable duties on the bank. However, the court found that, based on a proper construction, the Code had not been incorporated into the contract (DBS v San Hot) and that the Code could not imply any duties into the contract that were inconsistent with the express wording in the bank's standard terms (Kwok v HSBC). Further, the court (in DBS v San Hot) pointed out that the Code was primarily promulgated for the purpose of determining whether a person was a fit and proper person to be or to remain as a licensed or registered person under the SFO, and that the Code was not admissible in any legal proceedings other than proceedings under the SFO. In other words, the Code did not in itself give rise to contractual or statutory liabilities to customers.


2. Singapore Cases


There has however been more of a pro-customer trend in recent Singapore cases, in particular where the customer was considered to be less sophisticated. In the most recent case of Deutsche Bank AG v Chang Tse Wen [2012] SGHC 248 the court held that the bank had undertaken a pre-contractual duty to advise the customer on the management of his wealth and that that duty was not subsequently negated by the customer signing documentation which contained standard non-reliance, own-judgement and non-advisory/execution-only clauses.


Pre-contractual duty to advise


This was an accumulator case in which the customer made it clear to the RM at the pre-contractual stage that he was looking to retain the bank to advise him on managing his newly acquired wealth, as he had limited investment experience. The RM represented to the customer that the bank was able to and would provide a range of wealth planning services and provided the customer with brochures setting out the services available. The judge acknowledged that the mere giving of advice without more did not establish a duty of care. However, he found that in this case the bank had "crossed the line" and had assumed a pre-contractual duty to advise the customer on managing his new wealth, as the customer was inexperienced, had expressly said that he was looking for advice, the RM had confirmed that the bank would be able to provide advisory services and had in fact provided some preliminary advice on the sale of shares. This was despite the fact that a specialised advisory agreement was never entered into.


Evidential and contractual estoppels


The customer was subsequently sent account opening documentation, which included a Service Agreement containing standard term non-advisory, own-judgement and non-reliance clauses. He was also sent and signed documentation relating to the purchase of the accumulators, which contained similar disclaimers. However, the court found that the bank could not rely on the disclaimers to bar the customer from relying on the bank's pre-contractual duty to advise. The court placed great weight on the fact that the customer was not a sophisticated investor, which is why it found that it could distinguish the case from an earlier judgment of the Singapore Court of Appeal in Orient Centre Investments Ltd and another v Societe Generale [2007] 3 SLR(R) 566 in which the Court of Appeal had held that relevant express disclaimers provided an "insuperable obstacle" to any claim based on alleged breaches of duties of care whether based on contract or tort.


The court found that the disclaimers did not allow the bank to establish an evidential estoppel, as they had not been brought to the customer's attention. This meant that the bank could not show that the customer intended the bank to rely on them. The court stated that "the case might have been different had [the customer] been told by the RM before he signed the account application form that he could not rely on the RM or [the bank] to exercise reasonable care in advising him on managing his new wealth but that he should retain his own independent professional or legal advisors to advise him on any service or transactions he would enter through or with the RM and [the bank]". This looks very similar to the "Interfoto argument", which was resoundingly rejected by the Hong Kong court in DBS v San Hot.


Further, the court held that the doctrine of contractual estoppel should not apply in cases where the customer is financially inexperienced and the RM and the bank have specialist experience and undertook pre-contractually to advise the customer in managing his wealth. In support of this view, which appears to deviate from the approach of the English and Hong Kong courts (although relevant cases have so far related to sophisticated investors), the judge referred to an obiter remark of the Singapore Court of Appeal in Als Memasa and another v UBS AG [2012] SGCA 43 in which the Court of Appeal indicated that it might be desirable to reconsider whether financial institutions should be entitled to invoke non-reliance clauses against unsophisticated customers. The decision in Als Memasa (which granted the customers leave to appeal) related to customers who were businessmen, but who did not speak or sufficiently understand English.


Deutsche Bank AG has announced that it will appeal the judgment and there may very well be a further judgment by the Singapore Court of Appeal on the issue of "contractual estoppel" soon.


3. A recent English case: Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184


Brief mention should be made of a recent English Court of Appeal judgment in which the bank was held to be liable for misselling. In this case, the customer had made it clear that he could not accept any risk as he needed the capital to purchase a home and that he was looking for an investment that was "as good as cash". The court at first instance (Rubenstein v HSBC Bank plc [2011] EWHC 2304 (QB)) found that the customer was provided with advice and that the bank was negligent in providing that advice. Although the first instance judge found that the loss suffered was too remote as it was a result of unforeseeable "extraordinary and unprecedented financial turmoil", this was overturned on appeal and the bank was found by the Court of Appeal to be liable for the customer's losses. The characterisation of the relationship as "advisory" was not appealed, which is why the findings of the court below remain of interest.


An advisory or execution-only relationship?


The court at first instance considered that the question of whether a bank gave advice or only information depended on what was said and done by the bank's employee and, also, on the nature of the customer's enquiry. Where the customer asks for a recommendation, the bank's response is likely to be regarded as advice unless there is an express "execution-only" disclaimer. Further, where the information is accompanied by a value judgment this implies the giving of advice.


In Rubenstein, the bank's employee who provided the "advice" was a fully qualified "whole of market" Independent Financial Advisor (IFA) who responded to the customer's enquiry about a "no risk" investment by recommending one particular product which he described as being "as good as cash". No "execution-only" disclaimers were signed. On the contrary, the relationship was descried as advisory on the bank's FEEPAY form. The court found that the bank's IFA had breached his duty to advise the customer with due care and skill by suggesting only one product, although there was a more conservative option that was better suited to the customer's risk profile and by falsely describing the product as being "as good as cash" when it was subject to both default and market risk.


Breach of statutory duty under the COB rules


Unlike the situation in Hong Kong, a breach of the regulatory Conduct of Business Rules (COB) (which applied in the Rubenstein case and have since been replaced by the very similarly phrased Conduct of Business Sourcebook (COBS)) gives rise to an action for damages for breach of statutory duty, pursuant to section 150 of the Financial Services and Markets Act 

2000. The bank was found to have breached a number of COB rules (eg, to provide clear, fair and not misleading information, to take reasonable care to ensure the suitability of advice, and to carry out a "know your customer" assessment), which meant that the bank was also found to be liable for breach of statutory duty.


4. Lessons to be learnt


The above cases highlight a number of "traps" to avoid if a bank wishes to avoid being found liable for a customer's investment losses. In particular:


• If a transaction or relationship is to be "execution-only", banks should ensure that the relevant disclaimer language is included in the documentation provided to the customer and is countersigned by the customer. Otherwise a duty to advise may arise.

• RMs should be instructed to draw the disclaimer language to the customer's attention and keep a note of this having been done, as otherwise a court may find that the bank may not be able to rely on the disclaimer. This is especially the case if the customer is considered to be insufficiently "sophisticated".

• Banks should carry out "know your customer" and "attitude to risk" checks and update the checks as required. The banks in the cases reviewed above were criticised for either not having carried out such checks at all or for having been inaccurate and self-serving when carrying them out. A proper KYC process will assist when showing that a customer was suitably "sophisticated" and, where a relationship is held to be advisory, to show that regulatory requirements were complied with and that advice provided was "suitable" in light of an accurate risk profile.

• Banks should provide "easy-to-understand" product information which contains a fair overview of the risks involved. The fact that customers were provided with information and "understood" the information influenced the court's decisions in Kwok v HSBC and DBS v San Hot that the customers were sufficiently "sophisticated" and/or that no misrepresentation had been made.

• Where a relationship is to be "execution-only" banks should ensure that marketing materials and their RMs make no pre-contractual promises to provide financial or investment advice.



For further information, please contact:

Mark Johnson, Partner, Herbert Smith Freehills
Gavin Lewis, Partner, Herbert Smith Freehills


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