Was Lehmans' collapse unforeseeable?  The High Court said it was - but FOS disagrees

05 March 2012

The courts and FOS are now headed down very different paths in their approach to credit crunch losses suffered by clients of regulated firms.

While FOS has all but abandoned the general law of causation in its approach to cases of consumer detriment, we have observed how the courts have held again and again that the general law of causation applies to mis-selling claims.

The latest High Court judgment to confirm this divergence is Camerata Property Inc v Credit Suisse Securities (Europe) Limited [2012] EWHC 7 (Comm). Mr Justice Flaux held that losses incurred on a Lehman Brothers note were not recoverable because the collapse of the investment bank in 2008 was not foreseeable. This added to the earlier findings of Mr Justice Smith in related proceedings who held in early 2011 that the claimant company would not have sold the Lehman Brothers note in which it had invested even if it had been provided with adequate warnings as to counterparty risk in 2008.

Importantly, however, Flaux J added, obiter, that, having regard to the principles set out by Lord Hoffmann in SAAMCO [1996] UKHL 10, even if the claimant had been successful in proving that it would not have purchased the note had it been properly advised, the defendant bank could only be liable for the foreseeable losses caused by providing negligent advice.  Were it not for counterparty failure, the claimant would have made a substantial profit from the note.  Given this, the court held that "the only reason why Camerata has suffered any loss at all, as opposed to making a substantial profit, is because of the collapse of Lehman Brothers, which was unforeseeable."

Despite such unequivocal conclusions about the legal position from the High Court, FOS ombudsmen have held regulated firms liable regardless. When faced with a complaint on very similar facts about negligent advice relating to the risk of a financial crisis in 2008, Ombudsman Tony Boorman was of the opinion that "[i]n the years before Lehman Brothers’ collapse, the possibility of a significant financial institution running into difficulty was an unlikely, but not a remote possibility." His published provisional decision provided a potted history of financial collapses since BCCI, concluding with the observation that: "Anyone who purchased a house in 1988 before the collapse in the UK housing market, or had a mortgage in 1989 when mortgage rates rose to 15% – levels that would seem inconceivable now – would also know that a feature of many markets is that extreme conditions can occur." 

On the basis of this anecdotal knowledge (and in the case of Williams, the Courts accepted it is appropriate for an Ombudsman to take into account his personal experience), the Ombudsman held that the respondent bank's IFA ought to have correctly identified the risk posed by such potential collapses when advising on an investment in the AIG Enhanced Fund. Given that Flaux J came to the conclusion in Camerata that an international bank ought not reasonably to have foreseen the collapse of Lehman Brothers when advising on the counterparty risk posed, it might seem remarkable that an IFA should have been required to advise on the risk of the collapse of AIG.

Despite this apparently surprising FOS decision, those tempted to complain that it does not apply the law must accept that, as has been made increasingly clear recently, the FOS was not designed to do so. Mr Boorman's decision demonstrates that he was fully aware of the High Court's adherence to the law of causation. He summarised the court's judgment in Rubenstein (which, I understand, is being appealed) that the losses suffered by another investor in the AIG Enhanced Fund were not caused by the defendant bank's poor advice but by rumours of AIG's bankruptcy; and that in any case the loss was not foreseeable and was, therefore, too remote in law to be recoverable. Nonetheless, Mr Boorman said that his "general approach in assessing fair compensation in retail markets is to seek to return customers to the position they would have been in but for the negligent advice" and the "fact that there were (relatively) extreme market conditions in this case does not appear to me to justify a change in that approach".

The important message to take from this analysis is the reminder that FOS has its own jurisdiction, deliberately created entirely separate and distinguishable from the courts.

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