When a financial adviser will be liable for the full extent of a client's losses

03 January 2013. Published by Ben Gold, Partner

For banks, investment advisers, and their professional indemnity insurers, the Court of Appeal ruling in Rubenstein v HSBC

(Click here to read...) has been eagerly anticipated.  The Court of Appeal's judgment was reported on 12 September 2012.

In this case, the customer wanted a short term home for his money (raised from the sale of his marital home) whilst he and his wife looked for a new property (they were going to rent in the interim).  The investment adviser (an employee of HSBC) recommended a particular AIG "bond".For banks, investment advisers, and their professional indemnity insurers, the Court of Appeal ruling in Rubenstein v HSBC

The bond was more like a fund, the shares in which could go up or down in value, depending on the value of the underlying investments. 

Mr Rubenstein had made clear to the adviser that he did not want any risk to capital – he did not want an investment that could go down in value.

The Court of Appeal agreed that, in those circumstances, HSBC was under a duty to insulate him from any risk to capital due to market fluctuations ("market risk"). 

By recommending the AIG bond to Mr Rubenstein, HSBC breached that duty: as above, the bond could go up or down in value. This was not explained to Mr Rubenstein but, had it been, he would have placed his money in a bank account.

The shares in the bond went down in value, because of the Financial Crisis, and Mr Rubenstein got out less than he put in (around £180,000 less). 

At the time of the adviser's recommendation (2005), the Financial Crisis may not have been foreseeable (and the adviser might reasonably have regarded the chances of Mr Rubenstein suffering a loss as negligible), but that did not provide the adviser with a defence.  The Court of Appeal held that, as HSBC's duty was to insulate Mr Rubenstein from any market risk at all, HSBC could not avoid liability on the basis the Financial Crisis was an entirely unprecedented event.

In our view the case shows that if a financial adviser is under a duty to protect his client against the occurrence of a particular investment risk, should that risk come to pass the adviser is liable for the full extent of the loss, even if the events leading to the loss were entirely unforeseeable at the time of his advice. 

For a more detailed analysis of the case, please see our full article (click here to read...).

It is interesting that the adviser would probably not have been liable had it explained to the customer that the bond could go down in value, whilst saying the risk of that happening was basically negligible, even if the customer had in reliance on that advice invested in the bond (and still suffered the loss).  It is difficult to see how that advice (that the risk of the bond going down in value was negligible) would have been negligent, given the Financial Crisis was unforeseeable at the time.  The liability was grounded in the fact that: (a) the customer did not want any risk to capital; (b) it was not explained to him that there was a risk to capital, however negligible; and, (c) had that been explained, the customer would not have invested.  These are fairly unusual / extraordinary facts.  Defendants may therefore be able to distinguish this case when it is cited by claimants.