Lender’s casebook: Blame it on the credit crunch?

HSBC has recently learnt firsthand the limits of blaming the difficult economic climate for losses suffered by their customers as well as the consequences of providing negligent investment advice. Fiona Hayles, senior associate, dispute resolution group at SGH Martineau LLP reports

In the recent case of Rubenstein v HSBC Bank Plc, Mr Rubenstein was one of HSBC’s retail clients who came to the bank for independent advice about investing £1.25 million.

The bank’s independent financial advisor recommended an enhanced variable rate fund within an AIG Premier Access Bond. Rubenstein sent an email to the adviser, stating that he could not afford to accept any risk in the principal sum that he wished to invest and that he wanted ready access to the money.

He also asked what risk was associated with the product, to which the advisor replied that the investment was the same as cash deposited in a HSBC account. On the basis of this advice, Mr Rubenstein invested £1.25 million in the recommended fund.

In September 2008, at the onset of the financial crisis, Rubenstein withdrew his money from the fund as the financial conditions meant that the fund had to be closed. On withdrawal, he received just over £179,000 less than the £1.25 million invested.

As a result, Rubenstein claimed that he had been negligently advised, stating that if he had placed the money in a deposit account instead, he would have got back the full £1.25 million plus interest.

In April 2011 a payment of £7,195 was made to Rubenstein by the company which controlled the fund in which he invested, after it distributed assets on the fund’s close.

The judge at first instance decided that although the bank had given Rubenstein negligent advice which he had relied upon, the loss he suffered was not caused by the negligent advice but by the unforeseen financial crisis.

He was therefore awarded only a small amount of damages for breach of contract. The judge also said that the payment of £7,195 should be treated as a credit against those damages.

Rubenstein therefore took the case to the Court of Appeal, claiming the loss of capital which he suffered due to the economic climate was foreseeable and that this was exactly the risk that he had wished to guard against.

The Court of Appeal held that what connected the incorrect advice and the loss was the advice to invest in a fund which would be subject to market losses and the Bank misleading him by telling him that the investment was the same as a cash deposit, which it was not.

Therefore it was the duty of the bank to protect Rubenstein against risks that he had made clear he wanted to guard against. Rubenstein’s appeal therefore succeeded. However, it was correct that the payment of £7,195 was a credit against the damages.

Banks should be aware of the risks of a claim for professional negligence, particularly in relation to investment advice given around the time of the credit crunch.

It is important to ensure that a range of options are provided and that accurate records are kept of all discussions and correspondence between the advisor and client, in order to guard against any such claims.