The Federal Tribunal recently rendered a decision in a dispute between a bank and its client, a company, with regard to a (discretionary) wealth management contract. The claimant sought damages from the bank for a loss relating to the performance of the contract. This decision serves as a reminder of the fundamental issues of substantive law and gives food for thought in terms of the various legal and strategic approaches to resolving a conflict.
In November 2010 the company (whose director and beneficial owner were both well versed in the finance industry) signed:
- a management mandate;
- investment instructions for management mandates with a conservative profile (out of three available profiles, the other two being riskier);
- a complement to the management mandate, which provided that the client was aware that non-traditional/alternative investments are riskier than traditional investments and that the client had obtained all relevant information in this regard;
- specific conditions relating to forward contracts and traded options;
- specific conditions relating to foreign exchange operations and precious metals; and
- general terms and conditions, which provided that unless the client challenged periodic statements of account and transaction notices within a certain time, the client would bear any damage.
In May 2011 the client asked for a statement of its account as at the end of April 2011. The performance was close to 1%. A week later, the relationship manager informed the asset manager that the client wanted to increase the performance of the portfolio, while capping the losses at 5%. The following day the bank bought futures and issued corresponding transaction notices. The client's profile remained recorded as 'conservative'.
In early June 2011 the bank provided the client with a portfolio statement which notably contained a discharge in favour of the bank for the management of the account until then. The client's representative signed the statement. The (positive) performance was then almost 4%.
In August 2011 the asset manager informed the relationship manager that the client's profile should have been changed in May 2011 to reflect the client's updated instructions. By the end of August 2011, the performance of the account was -20%.
In 2013, after commissioning an expert report, the client sued the bank for the loss that it had suffered. The Federal Tribunal dismissed the recourse after the claimant had been unsuccessful before both cantonal instances.
Before dealing with the bank's alleged breach of its contractual obligations, the Federal Tribunal first had to determine the terms of the disputed agreement as the parties differed with regard to the risk profile. The client argued that the profile was conservative and that any use of non-traditional investments had to remain within the boundaries of conservative asset management. The bank argued that the use of non-traditional investments had to be interpreted as the client's wish for dynamic asset management.
The Federal Tribunal held that, while the client had signed the complement to the management mandate regarding alternative investments, these investments could in this case be made only in the frame of the conservative profile requested by the client, which the bank had agreed to and recorded in its IT system. The Federal Tribunal criticised the lower court, which had arbitrarily held that the parties had agreed a dynamic investment profile "under cover of a non-traditional conservative profile" (described as an "obscure qualification" by the Federal Tribunal), which allowed all risks, based solely on the fact that the client had signed the complement to the management mandate regarding alternative investments.
The next question to be addressed was whether the risk profile had changed with the instructions given by the client in May 2011. The Federal Tribunal held that, in light of the alternative investments made immediately following the client's instructions, the bank had obviously understood them to imply a change in the client's investment profile. As the lower court had held that the client had ratified the litigious investments and as the client had failed to show that such factual elements were arbitrary, the Federal Tribunal, which was bound by the findings of the lower court, did not dwell on whether the bank had rightly understood the client's request to increase the performance of its account as a change in management profile.
The Federal Tribunal went on to assess whether the asset management aligned with the client's conservative profile until May 2011, which the lower court had found to be the case. The Federal Tribunal considered this finding to be arbitrary because it relied solely on the testimonies of the bank's employees. Despite that, the fact remained that the client had signed the transaction notices and given the bank discharge in June 2011. The Federal Tribunal referred to previous decisions where it had held similar clauses to be valid, stressing that in cases of disagreement, it is not enough for a client to complain to its relationship manager over the phone. Clients are protected only in cases where their bank commits an abuse of rights or where they are inexperienced and fail to realise that investments have been made in breach of their mandate agreement (which was not the case in this dispute).
As for the subsequent management period (ie, when the investment profile had been changed to dynamic), the Federal Tribunal rejected the client's arguments regarding the disputed investments made in the summer of 2011 because they relied on the allegedly conservative investment profile and did not take into account the client's instructions of May 2011 to amend its profile risk. The Federal Tribunal further held that discharge had been given to the bank for all investments until 6 June 2011.
Five points are worth highlighting.
Clarity in contractual relationships
This decision underlines the need for clarity in contractual relationships, particularly in banking relationships. The bank's duty of diligence under the mandate agreement (as enshrined also in the Federal Act on Financial Services and the regulations issued by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss Bankers Association) requires it to define the client's risk profile clearly. This serves to enable the bank to define a strategy and inform the client of the risks, taking into account the client's experience in the field (the higher the risk, the more stringent the duty to inform).
Wealth managers can assume that clients are aware of ordinary risks, so specific information need be provided only in connection with unusual risk factors, such as those relating to derivatives and structured products. However, even in the absence of a risk profile, previous jurisprudence suggests that clients cannot successfully claim damages after a wealth management agreement has been entered into by arguing that a defensive investment strategy would have met their expectations better when they have contractually agreed to a riskier type of investment.
The need for clarity is relevant for both banks and their clients. If banks make investments which are too risky in light of their clients' risk profile, the banks' liability is at stake. Conversely, if clients do not carefully consider the extent of their tolerance to risk, they may be precluded from challenging investments made for their account if their risk profile was (wrongly) in line with the investments made.
Assessment of risk profile
The fact that a client signs a document regarding the possible use of alternative investments does not make it de facto risk friendly. While the Federal Tribunal did not explicitly say so, the risk profile was decisive in this case. The client's acceptance that its assets could be invested in non-traditional investments meant that the related proportion of such investments, if any, had to fit within the frame of the conservative risk profile; there is no such thing as a 'non-traditional conservative profile'.
Timeframes for challenging investments
Contractual clauses that specify a timeframe for challenging investments are becoming increasingly common. These clauses provide that if the client does not object within a certain period (30 days in this case):
- the bank statement will be deemed accepted and the bank will be discharged of any liability; or
- the client will bear the related liability (as seems to have been the case in this instance).
Therefore, clients may not merely adopt a passive attitude but must pay due attention to the statements that they receive and swiftly inform their relationship manager of any disagreement in writing to preserve their rights.
Assessing damages
While mandating an expert with a view to assessing the damage before starting litigation can be useful, this is not enough and is certainly not a guarantee of judicial success. While this case is moot in this regard, a bank's client's first reaction should be to turn to a lawyer to assess whether all conditions for claiming damages are met, starting with whether the bank has breached the mandate agreement. An assessment of the damages comes only at a later stage.
Private expert reports
Privately mandated expert reports have no weight before Swiss state courts; they are treated as mere allegations and are given no evidentiary value. Only court-appointed expert reports (as rightly requested by the claimant in this case) will be considered as evidence. However, this will likely change with the upcoming revision of the Code of Civil Procedure, the draft of which provides that a private expert report is admissible as documentary evidence.
In this case, with hindsight, it seems that the claimant was bound to fail from the start. While it did prevail in demonstrating that the bank had disregarded its risk profile, it had systematically ratified all of the transactions entered into on its account on the wrong assumption that they were risk friendly. This alone meant that it was precluded from claiming any damages as a matter of principle. It ensues that hiring an expert to try and assess the damage was of no avail.
